What are qualified dividends?
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Key takeaways
- Qualified dividends are taxed at a lower rate than ordinary dividends.
- Most regular dividends from U.S. companies are considered qualified.
- Dividends from REITs, master limited partnerships and money market accounts are not considered qualified (more detailed list below).
Qualified dividends are a type of investment income that receive preferential tax treatment from the IRS. Compared to ordinary dividends, qualified dividends are taxed at a lower rate. To determine if a dividend is qualified, investors must consider factors such as the holding period and the type of investment.
Here’s what you need to know about qualified dividends and how they can benefit your portfolio.
How do qualified dividends work?
Qualified dividends are dividends that meet specific criteria to be taxed at the lower long-term capital gains rate. These dividends are usually paid by U.S. corporations or qualified foreign corporations to individual shareholders. The IRS requires that certain qualifications be met for dividends to be considered qualified. If the dividends do not meet the requirements, then they are taxed at ordinary income tax rates, which can be as high as 37 percent.
How to determine if a dividend is qualified
Here are some questions that will help you determine whether a dividend is qualified:
Are the dividends from a U.S. company or qualified foreign corporation?
If so, your dividends may be qualified. However, be sure to check whether a foreign company meets the following requirements.
The IRS considers a foreign corporation qualified if it has incorporated in a possession of the U.S. or is eligible for benefits of a comprehensive income tax treaty with the U.S. Additionally, if a foreign corporation does not meet either criteria, but is traded on a securities exchange in the U.S., it is treated as a qualified foreign corporation.
Do you meet the holding period requirements?
For most dividends from stocks and funds, you must have held the shares for 61 days out of a 121-day period that began 60 days before the security’s ex-dividend date. However, for certain preferred stock dividends to be treated as qualified dividends, the security must be held for 91 days out of the 181-day period beginning 90 days before the ex-dividend date.
Is it hedged?
A dividend cannot be qualified if it’s hedged. Hedging can include short sales, calls and puts, among other strategies.
Tax treatment of qualified dividends
Qualified dividends are usually taxed at the capital gains tax rate which is generally no higher than 15 percent. Your taxable income helps determine what rate you’ll pay. The chart below details how taxes may apply.
| Capital gains tax rate | Income | |
|---|---|---|
| Filing status | Single or married filing separately | Married and filing jointly or qualifying surviving spouse |
| 0% | $41,675 or less | $83,350 or less |
| 15% | More than $41,675 but less than or equal to $459,750; more than $41,675 but less than or equal to $258,600 for married filing separately | More than $83,350 but less than or equal to $517,200 |
| 20% | A net capital gain tax rate of 20% applies to your taxable income in excess of the thresholds set for the 15% capital gain rate. | |
| 28% | Certain exceptions including selling section 1202 qualified small business stock and net capital gains from selling collectibles | |
Source: IRS
Dividends earned each tax year will be reported on IRS Form 1099-DIV, which you should receive from your brokerage firm. The form includes details about both your qualified and non-qualified dividends and capital gains. To determine if your dividends are qualified, review the details in box 1b of your Form 1099-DIV. If the box is checked, your dividends are qualified.
Special tax considerations for high earners
High-income taxpayers may also be subject to the net investment income tax (NIIT). This is an additional 3.8 percent tax on investment income, including qualified dividends, for individuals with an adjusted gross income above certain thresholds.
You may be subject to the tax if you have a modified adjusted gross income over the following amounts:
| Filing Status | Threshold Amount |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of household (with qualifying person) | $200,000 |
| Qualifying widow(er) with dependent child | $250,000 |
Source: IRS
What dividends do not qualify as qualified dividends?
Dividends that do not meet the requirements for qualified dividends include:
- Real estate investment trusts (REITs)
- Master limited partnerships (MLPs)
- Non-qualified employee stock options
- Tax-exempt companies
- Money market accounts
- Special one-time dividends
Some dividends cannot be considered qualified dividends. For instance, to qualify as a qualified dividend, the shares cannot be associated with hedging strategies. See the section above on how to determine whether a dividend is qualified for further clarification.
Bottom line
Qualified dividends offer certain tax advantages and are generally taxed at a lower rate than ordinary dividends. To determine whether a dividend qualifies as a qualified dividend, investors should consider the type of dividend, the type of security it’s paid on and the holding period of the security. Knowing the differences between qualified dividends and ordinary dividends can help maximize after-tax returns.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
