"Qualified" and "ordinary" dividends are reported in separate boxes on Internal Revenue Service Form 1099-DIV. Ordinary dividends are reported in box 1a, and qualified dividends in box 1b. The two types of dividends are treated differently for tax purposes.
- "Qualified" and "ordinary" dividends are reported in separate boxes on Internal Revenue Service Form 1099-DIV.
- Qualified dividends are those that are taxed at capital-gains rates, as opposed to income-tax rates, which are generally higher.
- The rule applies to dividends from money-market funds, net short-term capital gains from mutual funds, and other stock distributions.
What Are Qualified Dividends?
Qualified dividends are those that are taxed at capital-gains rates, as opposed to income-tax rates, which are generally higher. To qualify, they must be generated by stocks issued by U.S.-based corporations or foreign corporations that trade on major U.S. stock exchanges, such as the NASDAQ and NYSE.
The rule applies to dividends from money-market funds, net short-term capital gains from mutual funds, and other distributions on stock.
The stocks must be held for at least 60 days within a 121-day period that begins 60 days before the ex-dividend date, which is the first date following the declaration of a dividend on which the holder is not entitled to the next dividend payment. The number of days includes the day the recipient sold the stock but not the day he acquired it, and he cannot count days during which his "risk of loss was diminished," according to IRS rules.
Applicable Tax Rates
Dividends that meet these criteria are taxed at the long-term capital-gains rate, which ranges from 15% to 20%. Investors at the 15% income-tax rate or below pay no taxes on qualified dividends. Investors at the 25% rate or higher save the most on qualified-dividend taxes.
The rate on qualified dividends for investors with ordinary income taxed at 10% or 12% is 0%. Those paying income-tax rates greater than 12% and up to 35% (for ordinary incomes of up to $434,550) have a 15% tax rate on qualified dividends. The rate is capped at 20% for individuals in the 35% or 37% tax brackets and with ordinary income exceeding $434,550.
What Are Ordinary Dividends?
Ordinary dividends are those that do not meet the above criteria. Investors pay tax on these dividends at their ordinary income-tax rates. As of 2020, tax rates range from 10% to 37%. Investors with an adjusted gross income of $200,000—$250,000 for joint filers—also pay an additional 3.8% tax net investment income tax on dividend income. At the same thresholds, they also pay a 0.9% Medicare tax.
Implications for Retirement Accounts
People who include dividend-paying stocks in their retirement investment accounts, such as 401(k)s, do not pay taxes on dividends until they begin taking distributions on the funds. People with Roth IRAs enjoy the greatest tax benefit because distributions are typically tax-free, assuming the account holder follows the rules for Roth IRA distributions.