Qualified vs Ordinary Dividends

The distinction between qualified and ordinary dividends can dramatically impact your after-tax returns. Understanding which dividends qualify - and why - helps with tax planning and investment selection.

Qualified Dividends

Qualified dividends receive preferential tax treatment at long-term capital gains rates:

• 0% for income up to ~$44,000 (single) / ~$89,000 (married)
• 15% for income up to ~$492,000 (single) / ~$553,000 (married)
• 20% for income above those thresholds
• Plus 3.8% Net Investment Income Tax for high earners

Requirements for Qualified Treatment

To qualify for lower rates, dividends must: 1. Come from U.S. companies or qualified foreign corporations 2. Meet holding period: Own stock 60+ days during 121-day window around ex-date 3. Not be excluded: Certain types are explicitly disqualified

Ordinary Dividends (Non-Qualified)

Taxed at your marginal income tax rate (10% to 37%). Common sources:

• REIT dividends (ordinary income portion)
• BDC dividends
• Covered call ETF distributions (options premium)
• Bond fund interest
• Money market dividends
• Dividends from stocks held < 60 days

Tax Impact Example

$10,000 in dividends for someone in 32% bracket:

• Qualified: $1,500 tax (15% rate) = $8,500 after-tax
• Ordinary: $3,200 tax (32% rate) = $6,800 after-tax
• Difference: $1,700 annual tax savings from qualified treatment

Finding Your Dividend Classification

• Check Form 1099-DIV:
• Box 1a: Total ordinary dividends
• Box 1b: Qualified dividends (subset of 1a)
• Fund fact sheets often disclose historical qualified percentage

Strategy Implications

• Hold ordinary income generators in tax-advantaged accounts
• Keep qualified dividend payers in taxable accounts
• High-income investors benefit most from qualified dividends
• Consider tax-managed funds that maximize qualified percentage