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 $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.
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 two decades 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 2024 tax year:
Swipe to scroll horizontally
| Status | Taxable income | Tax rate |
|---|
| Single | $0 to $47,025 | 0% |
| Row 1 - Cell 0 | $47,026 to $518,900 | 15% |
| Row 2 - Cell 0 | $518,901 or more | 20% |
| Married, filing jointly | $0 to $94,054 | 0% |
| Row 4 - Cell 0 | $94,055 to $583,750 | 15% |
| Row 5 - Cell 0 | $583,751 or more | 20% |
| Head of household | $0 to $63,000 | 0% |
| Row 7 - Cell 0 | $63,001 to $551,350 | 15% |
| Row 8 - Cell 0 | $551,351 or more | 20% |
| Married, filing separately | $0 to $47,025 | 0% |
| Row 10 - Cell 0 | $47,026 to $291,850 | 15% |
| Row 11 - Cell 0 | $291,851 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? ›
Strategies such as contributions to retirement accounts and health savings accounts (HSAs) may reduce your income below the zero-capital gains tax threshold. As a result, you wouldn't owe any taxes on qualified dividends.
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.
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.
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.
How much of qualified dividends are tax free? ›
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%.
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.
How do you determine if a company can pay dividends? ›
When comparing stocks for investing, it's common practice to see how many and which companies pay out in dividends. Some companies announce this information publicly, but you can also calculate this amount by pulling information from the company's financial statements with its 10-K filings.
Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.
What stock dividends are not taxable? ›
If shares are held in a retirement account, stock dividends and stock splits are not taxed as they are earned. 1 Generally, in a nonretirement brokerage account, any income is taxable in the year it is received.
How to avoid double taxation on dividends? ›
How to Avoid Double Taxation
- Retaining corporate earnings. You can avoid double taxation by keeping profits in the business rather than distributing it to shareholders as dividends. ...
- Pay salaries instead of dividends. You can distribute profit as salaries or bonuses instead of as dividends. ...
- Split income.
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.
What is the minimum dividend income to report to IRS? ›
If you receive over $1,500 of taxable ordinary dividends, you must report these dividends on Schedule B (Form 1040), Interest and Ordinary Dividends. If you receive dividends in significant amounts, you may be subject to the Net Investment Income Tax (NIIT) and may have to pay estimated tax to avoid a penalty.
Why does my 1099-div show capital gains? ›
These capital gain distributions are usually paid to you or credited to your mutual fund account, and are considered income to you. Form 1099-DIV, Dividends and Distributions distinguishes capital gain distributions from other types of income, such as ordinary dividends.
What is the difference between preferred and qualified dividends? ›
Dividends on preferred shares are taxable income, but the tax rate you pay depends on whether the IRS considers the dividends to be "qualified." Qualified dividends are taxed at lower rates than ordinary income. For 2023 and 2024, the tax rate ranges from 0 % to 20% depending on your tax bracket.
Do I report qualified dividends on Schedule B? ›
Enter the amount of qualified dividends you received on line 5 of Schedule B. Enter the amount of ordinary dividends you received on line 6 of Schedule B. Add the amounts on lines 1, 5, and 6. If the total is over $1,500, you must complete Part III of Schedule B.
What is the difference between qualified and ordinary dividends on Turbotax? ›
Dividends can be either: Nonqualified (ordinary), which are taxed as ordinary income, or. Qualified, which are taxed as long-term capital gains at a lower rate.
Can you elect to treat qualified dividends as ordinary income? ›
In the right circ*mstances, electing to treat qualified dividends as ordinary income can increase your investment interest expense deduction, which could allow you to pay 0% tax on the dividends instead of the 15% or 20% tax that qualified dividends normally receive.
