Qualified vs. ordinary dividends
Two tax categories of dividends: qualified ones get lower long-term capital gains rates, while ordinary ones are taxed like wages.
What it means
Dividends from stocks and funds are taxed in one of two ways. Qualified dividends are taxed at the lower long-term capital gains rates. To qualify, they generally must come from a U.S. company or an eligible foreign company, and the shares must be held more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Ordinary, or nonqualified, dividends are taxed at regular income tax rates. Common examples include most REIT distributions, money market fund payouts and dividends on shares not held long enough. Form 1099-DIV shows total ordinary dividends and, as a subset, the portion that is qualified.
Example
For example, $1,000 of qualified dividends taxed at a hypothetical 15% long-term rate costs $150, while $1,000 of ordinary dividends at a hypothetical 24% income tax rate costs $240.
How it’s used
- Reading Form 1099-DIV at tax time
- Comparing the after-tax yield of stocks, funds and REITs
- Deciding which holdings to keep in taxable accounts
Good to know
- Selling shares shortly after the ex-dividend date can turn an otherwise qualified dividend into an ordinary one.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.