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Most dividends, which are regular payouts from a company to certain shareholders, are considered ordinary dividends, but some qualify for more favorable tax treatment and are called qualified dividends.
Understanding which type of dividend you have is important since they are taxed at different rates: Qualified dividends are taxed at the lower capital gains rate, while ordinary dividends are taxed as income.
Key Points
• Dividends are regular payouts to company shareholders, typically distributed from a company’s profits. Not all companies pay dividends, and dividend payments are never guaranteed.
• Dividends may be classified as ordinary dividends, which are taxed as ordinary income, or qualified dividends.
• Qualified dividends are taxed at the more favorable long-term capital gains rate, and must meet certain IRS criteria.
• IRS criteria for classifying dividends as qualified includes meeting holding period requirements, the eligibility of the company paying the dividends, and the eligibility of the dividend itself.
• Knowing the types of dividends you have is important for tax planning purposes.
What Is a Qualified Dividend?
Qualified dividends are ordinary dividends that qualify for a favorable tax treatment, based on IRS criteria they must meet. Qualified dividends are taxed at the lower capital gains rate, which ranges from 0% to 15% to 20%. In comparison, ordinary dividends, also referred to as unqualified dividends, are taxed as ordinary income.
Most investors won’t pay more than 15% on qualified dividends, according to the IRS, but they might owe as much as 37% in income tax on ordinary dividends. Given this, qualified dividends are preferred by investors.
Qualified dividends must meet certain requirements:
• The dividend typically must be paid by a U.S. company or a qualified foreign corporation.
• The dividend must not be of a disqualifying type, such as dividends paid on employee stock options or by tax-exempt organizations.
• In addition, it’s important to know the holding period, and how often dividends are paid. If you hold common stock, you must have held the shares for at least 61 days during the 121-day period starting 60 days before the ex-dividend date. (That’s the date by which an investor must have purchased shares of a stock in order to receive an upcoming dividend.)
• If you hold preferred stock, you must have held the shares for at least 91 days during the 181-day period starting 90 days before the ex-dividend date.
• A mutual fund must have held the investment unhedged for at least 60 days during the 121-day period starting 60 days before the ex-dividend date, and investors must have held their shares of the mutual fund for the same period.
Recommended: Capital Gains Tax Guide
How to Figure Out If You Have a Qualified Dividend
For investors about to count the number of days they’ve held a stock, they include the day they sold the stock, but do not include the day they bought it.
Here is an example:
Imagine you bought 1,000 shares of ABC Company common stock on July 2, 2025, and you sold the 1,000 shares on August 11, 2025. ABC Company paid a cash dividend of 25 cents per share with an ex-dividend date of July 15, 2025.
Since you held shares of ABC Company for only 40 days within the 121-day period beginning 60 days before the ex-dividend date, you did not meet the holding period requirement. That means the dividend is treated as an ordinary dividend rather than a qualified dividend, and your Form 1099-DIV should reflect that ordinary dividend amount in box 1a.
What Is an Ordinary Dividend?
In general, investors should assume that any dividend they receive is an ordinary dividend unless they’re told otherwise. The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.
Qualified dividends are reported in box 1b on IRS Form 1099-DIV, while ordinary dividends are reported in box 1a.
Certain kinds of dividends are not qualified dividends even if they’re reported in box 1b of your Form 1099-DIV. The IRS provides this list of dividends that are not qualified dividends:
• Capital gains distributions
• Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions
• Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year
• Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation
• Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property
• Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends
• Payments shown on Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends
Ordinary dividends must be reported on IRS Form 1040, and they are taxed at ordinary income tax rates ranging from 10% to 37% — the key distinction from qualified dividends, which are taxed at the lower long-term capital gains rates of 0%, 15%, or 20% depending on your income.
How Qualified and Ordinary Dividends are Reported at Tax Time
Generally, an investor will receive a Form 1099-DIV — “Dividends and Distributions” — from each institution or company that pays a dividend of $10 or more. This form reports your capital gains distributions, dividend and non-dividend distributions, and any taxes withheld from your payments during that tax year.
Even if an investor does not receive a 1099-DIV from a company, they are still required to report any dividends on their tax return.
On Form 1099-DIV, dividends are reported as follows:
• Box 1a: Ordinary dividends, representing the total dividends paid to you during that tax year
• Box 1b: Qualified dividends, and this will be the portion of total dividends that qualify for the lower tax rate
• Box 3: Non-dividend distributions, which are a nontaxable return of capital
If you have had taxes withheld from your dividends, this will be reported in box 4 for federal taxes, and 14 for state tax withholdings.
The Takeaway
Understanding qualified versus ordinary dividends can help investors make decisions about what account to hold their dividend-paying investments in: Inside a retirement account, such as an IRA, an investor will owe no taxes on dividend income, but they’ll often pay ordinary income taxes on all withdrawals.
Outside a retirement account, an investor will pay lower rates on qualified dividends, and may be able to use dividends to supplement other income or to reinvest in their portfolio.
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FAQ
What is the difference between ordinary and qualified dividends?
The key difference between ordinary dividends and qualified dividends is how each type is taxed. Ordinary dividends are taxed at ordinary income rates, which could potentially be as high as 37% depending on an investor’s tax bracket. Dividends that meet certain IRS requirements, however, qualify for the lower long-term capital gains rate.
What dividends are not eligible as qualified dividends?
Dividends are not eligible as qualified dividends if they fail to meet specific IRS requirements, including the holding periods specified for common stock, preferred stock, and mutual funds. Other disqualifications include, but aren’t limited to, dividends paid by non-qualifying foreign corporations or tax-exempt organizations, as well as dividends paid on employee stock options and dividends that are actually interest payments, such as for a deposit account with a financial institution.
Who benefits most from qualified dividends?
Investors generally benefit the most from qualified dividends, since qualified dividends receive a beneficial tax treatment. While ordinary dividends are taxed as ordinary income, qualified dividends are taxed at the lower long-term capital gains rates, which may be 0%, 15%, or 20%, as determined by income. High earners may additionally receive a 3.8% Net Investment Income Tax (NIIT) on either short- or long-term capital gains.
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