Table of Contents
- What Are Qualified Dividends?
- Key Takeaways
- Understanding Qualified Dividends
- Important Note
- Capital Gains Tax Rates
- Qualified Dividends vs. Ordinary Dividends
- What It Means for Investors
- Holding Periods for Other Investments
- Why the Favorable Tax Treatment?
- Requirements for Qualification
- How to Identify Qualified Dividends
- The Bottom Line
What Are Qualified Dividends?
Let me explain qualified dividends directly: they're ordinary dividends, which are payments from a public company to its common stock owners, but these get reported to the IRS and taxed at capital gains rates.
Key Takeaways
You can face a capital gains tax rate of 0%, 15%, or 20% on qualified dividends. Corporations report these to you via IRS Form 1099-DIV. For the dividend to qualify, hold your common stock shares for at least 61 days out of the 121-day period starting 60 days before the ex-dividend date.
Understanding Qualified Dividends
Qualified dividends originate from stocks of U.S. corporations or specific qualified foreign corporations. A dividend qualifies if you've held the stock for more than 60 days in the 121-day period that starts 60 days before the ex-dividend date. Remember, the ex-dividend date is one market day before the record date, which is when you must be on the company's books to get the dividend.
Take this example: If XYZ stock declares a dividend on November 20 with a record date a month later and an ex-dividend date of December 19, you qualify for capital gains tax on the dividend if you bought before December 19 and held for at least 61 days in that 121-day window starting 60 days prior. If you bought before but didn't meet the holding period, report it as ordinary income on your taxes.
Important Note
You receive the next dividend if you purchase stock before the ex-dividend date.
Capital Gains Tax Rates
Capital gains get taxed at 0%, 15%, or 20% based on your income. For collectibles or qualified small business stock, it can go up to 28%, and unrecaptured gains from Section 1250 real property up to 25%. Most of you will pay 0% or 15%, with only top earners at 20%.
On IRS Form 1099-DIV, Box 1a shows all ordinary dividends, while Box 1b lists the qualified portion from Box 1a that meets the criteria—paid by a U.S. or qualifying foreign company, with the holding period satisfied.
Qualified Dividends vs. Ordinary Dividends
Qualified and ordinary dividends affect your return differently due to tax rates. For 2025, if your taxable income is under $48,350 single or $96,700 joint, qualified dividends are taxed at 0%. Over that up to $533,400 single or $600,050 joint, it's 15%, and above those, 20%.
There's also a 3.8% net investment income tax on investment gains, calculated using the lower of your net investment income or the excess of modified adjusted gross income over $200,000 single, $250,000 joint, or $125,000 married separate.
What It Means for Investors
Most regular dividends from U.S. corporations qualify, but watch out for foreign companies, REITs, MLPs, or tax-exempt entities. A foreign corporation qualifies if it's U.S.-incorporated, eligible under a U.S. income tax treaty, or its stock trades on a U.S. market—unless it's a passive foreign investment company.
Certain dividends don't qualify at all, like those from REITs, MLPs, employee stock options, tax-exempt companies, money market accounts (report as interest), special one-time dividends, or those tied to hedging like short sales, puts, or calls—these face ordinary income rates.
Holding Periods for Other Investments
Preferred stocks require holding more than 90 days in a 181-day period starting 90 days before the ex-dividend date. For mutual funds, the fund must hold the security unhedged for 60 days in the 121-day period starting 60 days before ex-dividend, and you must hold your fund shares for the same period to get capital gains treatment.
Why the Favorable Tax Treatment?
This setup encourages companies to share profits with shareholders regularly and motivates you to hold stocks long enough for dividends.
Requirements for Qualification
Hold dividend-paying stock shares for at least 61 days within the 121-day period starting 60 days before the ex-dividend date.
How to Identify Qualified Dividends
Your broker or trading platform provides Form 1099-DIV, with ordinary dividends in Box 1a and qualified in Box 1b.
The Bottom Line
For most of you as individual investors, qualified dividends mean a tax break. Dividends from most American companies qualify, so focus on buying before the ex-dividend date and holding over 60 days to get the lower capital gains rate.
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