At some point in almost every investor's life, they'll be alerted to the fact that they're collecting "qualified dividends." That inevitably prompts the natural question: What are qualified dividends vs ordinary dividends?
Ultimately, the importance of this distinction has to do with how you're taxed on your dividends. The tax rate on qualified dividends is 15% for most taxpayers. (It's zero for single taxpayers with incomes under $44,625 and 20% for single taxpayers with incomes over $4492,301.) However, "ordinary dividends" (or "nonqualified dividends") are taxed at your normal marginal tax rate.
But on a more fundamental level: What exactly is a qualified dividend, and how do we know if the dividends paid by the stocks in our portfolios are qualified? And what investments pay out nonqualified dividends?
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Let's start by examining how qualified dividends were created in the first place. Then we'll explain how that affects the rules governing them and ordinary dividends today.
How qualified dividends came to be
The concept of qualified dividends began with the 2003 tax cuts signed into law by George W. Bush. Previously, all dividends were taxed at the taxpayer's normal marginal rate.
The lower qualified rate was designed to fix one of the great unintended consequences of the U.S. tax code. By taxing dividends at a higher rate, the IRS was incentivizing companies not to pay them. Instead, it incentivized them to do stock buybacks (which were untaxed) or simply hoard the cash.
By creating the lower qualified dividend tax rate that was equal to the long-term capital gains tax rate, the tax code instead incentivized companies to reward their long-term shareholders with higher dividends. It also incentivized investors to hold their stocks for longer to collect them.
The idea was to create a better kind of company and a better kind of investor.
It's debatable as to whether the lower rate had the desired effect; in the 17 years that have passed, companies (particularly in the tech sector) continue to hoard a lot of cash, and buybacks were credited with being one of the biggest drivers of the 2009-20 bull market.
But it's certainly true that dividends became more of a focus for both investors and the companies paying them following the 2003 tax reforms. Even tech darlings like Apple (AAPL) and Nvidia (NVDA) regularly pay dividends.
Qualified dividends vs ordinary dividends
To be a qualified dividend, the payout must be made by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.
The next requirement gets tricky.
The tax cut was designed to reward patient, long-term shareholders. So, to qualify, you must hold the shares for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.
If that makes your head spin, just think of it like this: If you've held the stock for a few months, you're likely getting the qualified rate. If you haven't, you're probably not, or at least not yet.
Certain types of stocks don't make the cut.
For example, real estate investment trusts (REITs) and master limited partnerships (MLPs) typically do not pay qualified dividends. REIT dividends and MLP distributions have more complicated tax rules; however, in some cases, they might actually have lower effective tax rates.
Money market funds and other "bond like" instruments generally pay ordinary dividends. So do dividends paid out via an employee stock-option plan.
The good news: It's actually not your problem to figure this out if you really don't want to. Your broker will specify whether the dividends you received are qualified or not in the 1099-Div they send you at tax season.
But knowing whether you're being paid qualified dividends can help you plan properly. Perhaps you can arrange your dividend stock portfolio such that your lower-taxed qualified dividends are paid into your taxable brokerage account and your higher-taxed ordinary dividends are paid into your IRA.
If all of this is making your head spin, we can summarize like this:
Most "normal" company stocks you've held for at least two months will have their dividends qualified. Many unorthodox stocks – such as REITs and MLPs – and stocks held for less than two months generally will not.
Also, while we summarized the tax basics above, here's a look at how qualified dividends are taxed for every situation for the 2023 tax year:
Swipe to scroll horizontally
| Status | Taxable income | Tax rate |
|---|
| Single | $0 to $44,625 | 0% |
| Row 1 - Cell 0 | $44,626 to $492,300 | 15% |
| Row 2 - Cell 0 | $492,301 or more | 20% |
| Married, filing jointly | $0 to $89,250 | 0% |
| Row 4 - Cell 0 | $89,251 to $553,850 | 15% |
| Row 5 - Cell 0 | $553,851 or more | 20% |
| Head of household | $0 to $59,750 | 0% |
| Row 7 - Cell 0 | $59,751 to $523,050 | 15% |
| Row 8 - Cell 0 | $523,051 or more | 20% |
| Married, filing separately | $0 to $44,625 | 0% |
| Row 10 - Cell 0 | $44,626 to $276,900 | 15% |
| Row 11 - Cell 0 | $276,901 or more | 20% |
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FAQs
Bottom line. Let's recap: the primary difference between ordinary dividends and qualified dividends is how they are taxed. Ordinary dividends are taxed as ordinary income at your regular tax rate, while qualified dividends are taxed at a lower rate, similar to the long-term capital gains tax rate.
Do I use ordinary dividends or qualified dividends? ›
Key Takeaways
Qualified dividends must meet special requirements issued by the IRS. The maximum tax rate for qualified dividends is 20%, with a few exceptions for real estate, art, or small business stock. Ordinary dividends are taxed at income tax rates, which as of the 2023 tax year, maxes out at 37%.
How do you tell if a company pays qualified dividends? ›
Qualified dividends are reported on Form 1099-DIV in line 1b or column 1b. However, not all dividends reported on those lines may have met the holding period requirement. Those non-qualified dividends, as well as other ordinary dividends, may be taxed at your ordinary income tax rate, which can be as high as 37%.
How do you avoid tax on qualified dividends? ›
Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.
Do I need to report dividends under $10? ›
The IRS does not require 1099 Forms in cases where the interest, dividends or short-term capital gain distributions are under $10. However, the IRS does require individuals to report these amounts under $10 on their tax returns.
Can you have ordinary dividends without qualified dividends? ›
Qualified dividends are a subset of your ordinary dividends. Qualified dividends are taxed at the same tax rate that applies to net long-term capital gains, while non-qualified dividends are taxed at ordinary income rates. It is possible that all of your ordinary dividends are also qualified dividends.
Are qualified dividends better? ›
Taxes on qualified dividends are more favorable and mimic long-term capital gains tax rates, which are currently at 0%, 15%, and a maximum of 20%. Whereas, non-qualified or 'ordinary' dividends are taxed at the less favorable ordinary income tax rates, which can reach a staggering 37%.
Why are my dividends both ordinary and qualified? ›
If, however, all your dividends are eligible for the qualified rate, 100% of your ordinary dividends would also be reported as qualified dividends. Another item that tends to confuse taxpayers is the return of capital (ROC) or "nondividend distribution" variety of payment also listed on the 1099-DIV.
At what income level are qualified dividends taxed? ›
2024 Dividend tax rates
| 2024 Qualified Dividend Tax Rate | For Single Taxpayers | For Married Couples Filing Jointly |
|---|
| 0% | Up to $47,025 | Up to $94,050 |
| 15% | $47,025 to $518,899 | $94,050 to $583,749 |
| 20% | More than $518,900 | More than $583,750 |
May 14, 2024
Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.
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.
Can you live off qualified dividends? ›
Creating a diversified portfolio, understanding the implications of dividend reinvestment plans (DRIPs) and being aware of tax efficiency are vital steps in maximizing dividend income while minimizing risks. The dream of living off dividends is attainable with the right financial planning and investment strategy.
Do qualified dividends affect your tax bracket? ›
Qualified dividends are taxed at capital gain rates of 0%, 15%, or 20%, depending on your tax bracket. If you are: In the 10% or 12% tax bracket, your qualified dividends are taxed at 0%, In the 22%, 24%, 32%, or 35% tax bracket, your qualified dividends are taxed at 15%, and.
Do I have to report $2 in dividends? ›
All dividends are taxable and this income must be reported on an income tax return, including dividends reinvested to purchase stock. If you received dividends totaling $10 or more from any entity, then you should receive a Form 1099-DIV stating the amount you received.
What is the minimum dividend income to report to IRS? ›
If you had over $1,500 of ordinary dividends or you received ordinary dividends in your name that actually belong to someone else, you must file Schedule B (Form 1040), Interest and Ordinary Dividends. Please refer to the Instructions for Form 1040-NR for specific reporting information when filing Form 1040-NR.
What happens if I forgot to file a 1099-div? ›
Often, the IRS will recalculate your tax return by including the missing income and determining the amount of tax they think that you owe. This can include penalties and interest. If you realize that you didn't include some income on your tax return, you can file an amended return that includes the missing information.
Does it matter whether dividends are qualified or not? ›
Ultimately, the importance of this distinction has to do with how you're taxed on your dividends. The tax rate on qualified dividends is 15% for most taxpayers. (It's zero for single taxpayers with incomes under $47,025 as of 2024 and 20% for single taxpayers with incomes over $518,901.)
Where do you put qualified dividends? ›
Enter any qualified dividends from box 1b on Form 1099-DIV on line 3a of Form 1040, Form 1040-SR or Form 1040-NR.
Are ordinary dividends the same as nonqualified dividends? ›
A nonqualified dividend is one that doesn't meet IRS requirements to qualify for a lower tax rate. These dividends are also known as ordinary dividends because they get taxed as ordinary income by the IRS.
Are dividends taxed when declared or paid? ›
Investors pay taxes on the dividend the year it is announced, not the year they are paid the dividend.
