Understanding Dividends: Qualified vs. Non-Qualified (2024)

FAQs

Understanding Dividends: Qualified vs. Non-Qualified? ›

Ordinary vs. qualified dividends: What's the difference? Put simply, a qualified dividend qualifies that payment for a lower dividend tax rate. Meanwhile, nonqualified or ordinary dividends get taxed at an investor's ordinary income tax rate.

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.

You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.

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.

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%.

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%.

The most common examples of non-qualified dividend accounts are employee stock option program, foreign investments, REITs, any special dividends, and any dividends that do not adhere to the holding period. Non-qualified dividends tax rate depends on the individual's income and tax situation.

The 45-Day Rule requires resident taxpayers to hold shares at risk for at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to Franking Credits.

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.

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.

What is an example of a qualified dividend? ›

Qualified Dividend Example

An investor buys 10,000 shares of a company on April 27 and then sells 2,000 of those shares on June 15. All shares are held unhedged at all times during the period. The ex-dividend date for the company was May 2.

Investors pay taxes on the dividend the year it is announced, not the year they are paid the dividend.

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.) However, "ordinary dividends" (or "nonqualified dividends") are taxed at your normal marginal tax rate.

Dividends from stocks or funds are taxable income, whether you receive them or reinvest them. Qualified dividends are taxed at lower capital gains rates; unqualified dividends as ordinary income. Putting dividend-paying stocks in tax-advantaged accounts can help you avoid or delay the taxes due.

Key Takeaways. All dividends paid to shareholders must be included on their gross income, but qualified dividends will get more favorable tax treatment. A qualified dividend is taxed at the capital gains tax rate, while ordinary dividends are taxed at standard federal income tax rates.

Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.

The stock must meet the holding period. For dividends to be taxed at the capital gains rate, the holding period may be 60 days for mutual funds and common stock and 90 days for preferred stock. If you don't meet the holding period, the dividend will not be qualified.

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.

Cash distributions from C-corporations are typically qualified dividends and generate taxable dividend income. For U.S. individuals, such dividend income will be subject to tax at short-term or long-term capital gains rates depending on their holding period.

Ordinary dividends, for tax purposes, includes both qualified and non-qualified dividends received. Generally, dividends of common stocks bought on U.S. exchanges and held by the investor for at least 60 days are "qualified" for the lower rate.