Qualified Dividend

Qualified Dividends

What is a qualified dividend?

A qualified dividend is an ordinary dividend that meets specific IRS requirements and is taxed at the lower long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates. Corporations report dividends to shareholders on IRS Form 1099‑DIV.

How qualified dividends are taxed

• Tax rates: qualified dividends are taxed at capital gains rates of 0%, 15%, or 20%, depending on taxable income.
• For the 2025 tax year (example thresholds): 0% if taxable income is below $48,350 (single) or $96,700 (married filing jointly); 15% for many middle-income taxpayers; 20% for the highest-income filers (thresholds cited in source material).
• Additional tax: net investment income tax (NIIT) of 3.8% may apply based on the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds thresholds ($200,000 single; $250,000 married filing jointly; $125,000 married filing separately).
• Reporting: Box 1a of Form 1099‑DIV shows total ordinary dividends; Box 1b shows the portion that qualifies for the lower capital gains rates.

Holding period and the ex‑dividend date

To be treated as qualified, dividends generally require a minimum holding period:
– Common stock: the shareholder must hold the shares for more than 60 days during the 121‑day period that begins 60 days before the ex‑dividend date (effectively at least 61 days).
– Preferred stock: the holding period is more than 90 days during the 181‑day period that begins 90 days before the ex‑dividend date.
– Mutual funds: the fund must have held the underlying security unhedged for at least 60 days of the 121‑day period, and the investor must hold the mutual fund shares for the same requisite period.
The ex‑dividend date is one market day before the record date; investors who buy on or after the ex‑dividend date are not entitled to the upcoming dividend.

Which dividends do and don’t qualify

Generally qualifying:
– Dividends paid by U.S. corporations.
– Dividends from certain foreign corporations that meet qualifying tests (e.g., incorporated in the U.S., eligible under a comprehensive tax treaty, or readily tradable on a U.S. established securities market).

Nonqualifying (taxed as ordinary income):
– Dividends from REITs and most master limited partnerships (MLPs).
– Dividends from tax-exempt entities and many foreign corporations that don’t meet the qualifying tests (including many passive foreign investment companies).
– Dividends on employee stock options tied to short sales, hedging transactions, or other positions that negate the holding requirement.
– Interest-like distributions such as those from money-market accounts.
– Special one-time or nonrecurring distributions that do not meet the holding-period or source tests.

Practical implications for investors

• Most regular dividends from U.S. corporations qualify and receive favorable tax treatment if holding requirements are met.
• To capture the lower rate, buy shares before the ex‑dividend date and satisfy the holding-period requirement.
• Brokers and trading platforms typically break out qualified vs. ordinary dividends on Form 1099‑DIV, making tax reporting straightforward.
• High earners should account for possible NIIT in addition to capital gains rates.

Why the preference exists

The lower tax rate on qualified dividends is intended to encourage companies to distribute profits to shareholders and to reward shareholder investment and longer holding periods.

Key takeaways

• Qualified dividends are taxed at long‑term capital gains rates (0%, 15%, or 20%) rather than ordinary income rates.
• Meet the holding‑period requirement (generally more than 60 days within a specified window) and source tests for a dividend to qualify.
• Form 1099‑DIV reports ordinary dividends (Box 1a) and qualified dividends (Box 1b).
• Certain entities and transaction types (REITs, MLPs, hedged positions, money-market distributions) do not produce qualified dividends.
• Consider NIIT and your taxable income level when estimating after‑tax dividend returns.

Sources
– IRS Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)
– IRS Topic No. 404: Dividends
– IRS Topic No. 409: Capital Gains and Losses
– IRS Topic No. 559: Net Investment Income Tax