One of the main benefits of holding an exchange traded fund is the tax advantages that it has over a mutual fund. Taxes on qualified dividend exchange traded funds can save investors lots of money.

Tax time is around the corner, and ETF investors may be wondering if their dividends are “qualified.” This is important because tax rates are much lower for those that fall under the category. [ETFs and Tax Efficiency]

In order for a dividend to be considered “qualified,” the equity in the fund paying the dividend must be owned by the investor for at least 60 days during the 121-day period that begins 60 days before the ex-dividend date. It can not be on the unqualified dividend list and it must be paid by a U.S. or qualified foreign corporation.

The tax rate for qualified dividend ETFs is between 5%-15% according to your income tax bracket. If an investor has an income rate higher than 25%, the qualified dividend rate is automatically 15%. If an investor has an income rate under 25%, the qualified dividend is taxed at 5%. [ETF Providers Announce 2011 Capital Gains Distributions]

All dividends are considered “ordinary” and those that are not defined as “qualified” are taxed as regular income. [ETFs and Taxes]

Until the end of 2012, qualified dividends will continue to be taxed at the current capital gains rate, which is set at 15%, reports Miranda Marquit for Bargaineering.com. Unless Congress changes tax rates, those investors that fall into a higher tax bracket have the potential to save hundreds or thousands of dollars with the capital gains rate taxed on their dividend income.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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