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Key Takeaways
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Qualified dividends are taxed at a lower rate than regular dividends.
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Most regular dividends from U.S. companies are considered qualified.
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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 receives preferential tax treatment from the IRS. Compared to regular dividends, qualified dividends are taxed at a lower rate. To determine dividend eligibility, investors must consider factors such as holding period and 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 gain rate. These dividends are generally paid by U.S. corporations or qualified foreign corporations to individual shareholders. The IRS requires certain qualifications to be met before dividends are considered qualified. If the dividends do not meet the requirements, they will be taxed at normal income tax rates, which can be as high as 37 percent.
How do you determine whether a dividend is eligible?
Here are some questions that will help you determine if a dividend qualifies:
Are the dividends from a US corporation or a qualified foreign corporation?
If so, your dividends may be eligible. However, check whether a foreign company meets the following requirements.
The The IRS considers a foreign corporation qualified if it is incorporated in a US possession or qualifies for the benefits of a comprehensive tax treaty with the US. In addition, if a foreign corporation does not meet either criteria but is traded on a U.S. stock exchange, it is treated as a qualified foreign corporation.
Do you meet the retention period requirements?
For most stock and fund dividends, you must have held the stock for 61 days in a 121-day period beginning 60 days before the security’s ex-dividend date. However, in order for certain preferred stock dividends to be treated as qualified dividends, the security must be held for 91 days of the 181-day period beginning 90 days before the ex-dividend date.
Is it covered?
A dividend cannot be qualified if it is hedged. Hedging can include short sales, calls and puts.
Tax treatment of qualified dividends
Qualified dividends are generally taxed at the capital gains tax rate, which generally does not exceed 15 percent. Your taxable income partly determines which rate you pay. The diagram below describes how taxes may apply.
| Capital gains tax rate | Income | |
|---|---|---|
| Archive status | Single or married person 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 filing separately | More than $83,350, but less than or equal to $517,200 |
| 20% | A net capital gains tax rate of 20% applies to your taxable income above the thresholds set for the 15% capital gains rate. | |
| 28% | Certain exceptions, including the sale of Section 1202 qualified small business stock and net capital gains from the sale of collectibles | |
Source: tax authorities
Dividends earned each tax year are 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 qualify, review the information in box 1b of your Form 1099-DIV. If the box is checked, your dividends are qualified.
Special Tax Considerations for High Incomes
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 adjusted gross income above certain thresholds.
You may be subject to the tax if you have adjusted adjusted gross income on the following amounts:
| Archive status | Threshold amount |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of Household (with eligible person) | $200,000 |
| Eligible widow(er) with dependent child | $250,000 |
Source: tax authorities
Which dividends do not qualify as qualified dividends?
Dividends that do not meet the requirements for qualified dividends include:
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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 example, to qualify as a qualified dividend, the stock must not be associated with hedging strategies. See the section above on how to determine if a dividend is eligible for further clarification.
In short
Qualified dividends offer certain tax benefits and are generally taxed at a lower rate than regular dividends. To determine whether a dividend qualifies as a qualified dividend, investors must consider the type of dividend, the type of security on which it is paid, and the period for which the security is held. Knowing the differences between qualified dividends and regular dividends can help you maximize after-tax returns.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
