Non-qualified dividends - Bogleheads (2024)

This article contains details specific to United States (US) investors. It does not apply to non-US investors.

A portion of your ordinary dividends may be non-qualified dividends because they can include items like these:

Taxable interest. When a mutual fund receives taxable interest, the income gets paid out as a dividend. It's a dividend when it goes out of the mutual fund, but it wasn't a dividend when it came into the mutual fund, so it can't be a qualified dividend.
Non-qualified dividends. A mutual fund or ETF may distribute dividends that are non-qualified. A fund must hold the security for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date. If this requirement is not met, the dividends do not qualify for the long-term capital gains rate and are treated as ordinary income.^[1]^[2]^{[note 1]}
Short-term capital gain. When a mutual fund or ETF has a short-term capital gain, it pays this amount to the shareholders as an ordinary dividend.
Time period to hold shares. To qualify for the long-term capital gains rate, you must own those shares for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date (the same requirement as a fund or stock). Otherwise, the dividend is non-qualified. This requirement applies even if the event is reported to you as a qualified dividend. You don't have to buy the shares 61 days before the dividend is paid, but the total amount of time you hold the shares (including time before and after the dividend) has to be at least 61 days.^[1]^{[note 1]}^{[note 2]}

Almost all of the dividends distributed by equity REITS come in the form of non-qualified dividends. Non-qualified dividends are taxed at marginal income tax rates.

Notes

↑ ^1.0 ^1.1 Certain preferred stock must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date.
↑ Stock shares must be held unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date. "Unhedged" means that no puts, calls, or short sales were associated with the shares during the holding period.

References

↑ ^1.0 ^1.1 "Qualified dividends". Fidelity. Retrieved June 24, 2022.{{cite web}}: CS1 maint: url-status (link)
↑ "Dividends on ETFs". Fidelity. Retrieved June 24, 2022.{{cite web}}: CS1 maint: url-status (link)

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v t e Tax considerations
Tax basics	Foreign tax credit Marginal tax rate Modified Adjusted Gross Income Progressive tax State income taxes Tax basics Tax news sources Taxable account Taxable equivalent yield Taxable equivalent yield (math)
Strategic tax considerations	Federal tax credits for individuals Gift tax Tax-efficient fund placement Tax-adjusted asset allocation Tax-managed fund comparison
Tax management	Delaying reinvestment of dividends Donating appreciated securities Estimated tax Paying a tax cost to switch funds Placing cash needs in a tax-advantaged account Reinvesting dividends in a taxable account Saver's credit Social Security tax impact calculator Tax analysis (math) Tax estimation tools Taxation of Social Security benefits Timing of transactions to reduce taxes
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Tax gain harvesting	Tax gain harvesting
Payroll taxes	Payroll deductions Cafeteria plan deductions FICA tax deductions Social Security as an investment
Tax data	IRS tax statistics Vanguard fund distributions
Non-US tax management	Non-US investor's guide to navigating US tax traps Nonresident alien's ETF domicile decision table Nonresident alien taxation Nonresident alien investors and Ireland domiciled ETFs Passive foreign investment company Passively managing individual stocks Taxation as a US person living abroad US tax pitfalls for a non-US person moving to the US US tax pitfalls for a US person living abroad US domiciled ETFs that are UK HMRC reporting funds

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Non-qualified dividends - Bogleheads (2024)

FAQs

Do you pay taxes on non qualified dividends? ›

Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.

What companies pay non qualified dividends? ›

An important qualifier for a lower tax rate is the type of company paying a dividend. For example, REITs, certain foreign companies, and MLPs don't qualify for lower tax rates. For REITs and MLPs, this is because their corporate structure is such that they pay no federal income tax.

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How do I know if a dividend is qualified or unqualified? ›

A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date.2 The ex-dividend date is one market day before the dividend's record date.

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Are ETF dividends qualified or nonqualified? ›

Some but not all equity ETFs pay dividends to their shareholders. Not all ETF dividends are taxed the same; they are broken down into qualified and unqualified dividends. Qualified dividends are taxed between 0% and 20%. Unqualified dividends are taxed from 10% to 37%.

How do I avoid paying tax on dividends? ›

Options include owning dividend-paying stocks in a tax-advantaged retirement account or 529 plan. You can also avoid paying capital gains tax altogether on certain dividend-paying stocks if your income is low enough. A financial advisor can help you employ dividend investing in your portfolio.

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Are reinvested dividends taxed twice? ›

Dividends are taxable regardless of whether you take them in cash or reinvest them in the mutual fund that pays them out. You incur the tax liability in the year in which the dividends are reinvested.

Are dividends taxed if reinvested? ›

The IRS considers any dividends you receive as taxable income, whether you reinvest them or not. When you reinvest dividends, for tax purposes you are essentially receiving the dividend and then using it to purchase more shares.

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Are nonqualified dividends included in gross income? ›

All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment.

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Are Apple dividends qualified? ›

Because it's a U.S. company and paid regular cash dividends, Apple's dividend qualifies for a lower tax rate.

What does the IRS consider a qualified dividend? ›

To qualify for the qualified dividend rate, the payee must own the stock for a long enough time, generally 60 days for common stock and 90 days for preferred stock. To qualify for the qualified dividend rate, the dividend must also be paid by a corporation in the U.S. or with certain ties to the U.S.

Are non-qualified dividends taxed in a Roth IRA? ›

How Are Dividends Within a Roth IRA Taxed? They aren't taxed at all. All earnings in a Roth IRA, including dividends issued by companies the Roth IRA invests in, grow tax free and can be withdrawn tax free in your retirement years.

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Why are my ETF dividends non qualified? ›

Nonqualified dividends: These dividends are not designated by the ETF as qualified because they might have been payable on stocks held by the ETF for 60 days or less. Consequently, they're taxed at ordinary income rates.

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Are S&P 500 dividends qualified? ›

However, if you're in the 10% or 15% tax bracket your tax rate on qualified dividends would be 0%. Remember that the exact tax you pay is tied to your tax rate and income. Also, most S&P 500 dividends are qualified for the lower dividend tax rate, but some might vary. Your brokerage tax form will give details.

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Are Vanguard dividends qualified? ›

Vanguard funds that distributed qualified dividend income

If your fund holds stock with a company, that company will often distribute dividends. If the company is a U.S. corporation, that dividend could be considered “qualified.” Qualified income is taxed at a lower rate.

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Do you pay taxes on ordinary dividends or qualified dividends? ›

Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. The payer of the dividend is required to correctly identify each type and amount of dividend for you when reporting them on your Form 1099-DIV for tax purposes.

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How are non-qualified distributions taxed? ›

Non-qualified distributions are subject to taxes, plus an additional 10% penalty. You may be able to avoid the 10% penalty if one of these exceptions applies: The distributions are part of a series of substantially equal periodic payments (SEPPS).

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Are non-qualified dividends capital gains? ›

If the dividends you receive are classified as qualified dividends, you pay taxes on them at the capital gains rate. The capital gains rate is often lower than the tax rate on non-qualified or ordinary dividends.

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Non-qualified dividends - Bogleheads (2024)

See also

Notes

References

External links

FAQs

Do you pay taxes on non qualified dividends? ›

What does the IRS consider a qualified dividend? ›