Investing News

Qualified and ordinary dividends are reported in separate boxes on Internal Revenue Service Form 1099-DIV. Total ordinary dividends are reported in box 1a, and qualified dividends in box 1b. The two types of dividends are treated differently for tax purposes.

Ordinary dividends include both qualified and non-qualified dividends, but the IRS separates these on tax returns by effectively subtracting qualified dividends from all ordinary dividends, with non-qualified dividends implicitly making up the balance. Qualified dividends may be taxed at a more favorable rate than non-qualified dividends, which are taxed as ordinary income.

Key Takeaways

  • Qualified dividends are taxed at capital gains rates rather than ordinary income-tax rates, which are higher for most taxpayers.
  • If the payment is not classified as a qualified dividend, it is a non-qualified dividend.
  • Ordinary dividends, for tax purposes, includes both qualified and non-qualified dividends received.
  • Generally, dividends of common stocks bought on U.S. exchanges and held by the investor for at least 60 days are “qualified” for the lower rate.

What Are Qualified Dividends?

Qualified dividends are those that are taxed at capital gains rates, as opposed to income-tax rates, which are higher for most taxpayers. 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 the 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 it was acquired, and days during which the stockholder’s “risk of loss was diminished” may not be counted, 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%.

The rate is 0% on qualified dividends for investors with ordinary income that is taxed at 10% or 12%. Those with income-tax rates greater than 12% and up to 35%, for ordinary incomes of up to $459,750 for single filers in 2022, are taxed at 15% on qualified dividends. The rate is capped at 20% for individuals in the 35% or 37% tax brackets and with ordinary income exceeding $459,750 for single filers in 2022.

What Are Non-Qualified Dividends?

Non-qualified dividends are those that do not meet the above criteria. Investors pay tax on these dividends at their ordinary income-tax rates. As of 2022, tax rates range from 10% to 37%. Investors with an adjusted gross income of $200,000, or $250,000 for joint filers, 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) accounts, 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 from the accounts are typically tax-free, assuming the account holder follows the rules for Roth IRA distributions.

CorrectionApril 3, 2022: A previous version of this article incorrectly labeled ordinary dividends as non-qualified dividends only. Ordinary dividends, for IRS purposes, include both qualified and non-qualified dividends.

Articles You May Like

How GE Vernova plans to deploy small nuclear reactors across the developed world
Tech stocks hit first all-time high since July
Top Wall Street analysts pick 3 stocks for their attractive prospects
AI play Pure Storage soars 22% after touting it won a contract with an unnamed big tech company
Art Cashin, New York Stock Exchange fixture for decades, dies at age 83