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How Do Qualified Dividends Work?

A qualified dividend is a dividend that “qualifies” for long-term capital gains tax rates rather than ordinary income tax rates. Come tax time, the difference can greatly impact your obligation to Uncle Sam. 

🤔 Understanding qualified dividends

A dividend is a payment that companies make to their shareholders. If you receive a dividend, you usually have to pay taxes on it. But how much depends on whether that payout is qualified or unqualified (ordinary). 

What is a qualified dividend?

A qualified dividend has to meet a few criteria: It must:

  • Be paid by a corporation registered in the United States or qualifying foreign corporation, such as one that’s:
  • Incorporated in a U.S. possession
  • Eligible under a comprehensive income tax treaty with the U.S. 
  • Readily tradable on an established U.S. securities exchange
  • Not be listed with the IRS as a dividend that doesn’t qualify, such as those paid by:
  • Real estate investment trusts (REITs)
  • Master Limited Partnerships (MLPs)
  • Passive foreign investment companies
  • Employee stock options
  • Tax-exempt companies
  • Not be paid on a savings account or as a special one-time dividend
  • Not be paid on hedged shares, such as short sale, put, or call options
  • Meet the appropriate dividend holding period
  • Common stock and mutual fund shares must be held for 61+ days during a 121-day period beginning 60 days before the ex-dividend date
  • Preferred stock must be held for 91+ days during a 181-day period beginning 90 days before the ex-dividend date

Qualified vs. unqualified dividend tax rates

Qualified dividends are taxed federally at long-term capital gains tax rates of:

  • 0% if you’re in the 10-12% income tax bracket
  • 15% if you pay an income tax rate between 12%-35%
  • 20% if you pay 35-37% of your income in taxes

By contrast, unqualified dividends are taxed at your ordinary income tax rate. 

In both cases, individuals who make over $200,000 annually ($250,000 for joint filers) also pay an additional 3.8% Net Investment Income Tax (NIIT). 

What this means for you 

For most investors, sorting qualified versus unqualified dividend-paying investments isn’t an issue, as most U.S. corporations pay qualified dividends. But investors who focus on emerging market investments, REITs, MLPs, or other securities may be in for a nasty surprise come tax time if you’re not prepared. 

And speaking of tax time: Brokers make it easy to compare your qualified and unqualified dividends. Every tax year, you’ll receive an IRS Form 1099-DIV that outlines your unqualified dividends (in box 1a) and your qualified dividends (in box 1b). 

If you own dividend-paying stocks, the status of your dividends makes a big difference come tax time. As such, your asset allocation is crucial. 

To start, if you want to take your dividend income now, it’s generally best to ensure that you:

  • Only invest in companies that issue qualified dividends
  • Keep eligible shares for the minimum holding period
  • Avoid hedging on any shares that pay dividends

However, there is a way to defer or even avoid paying taxes on most of your dividends: Hold your securities in a tax-advantaged account. With a traditional or Roth 401(k) or IRA, you can leave your dividends to grow your wealth tax-free (at least for the time being). 

Disclosures is the trade name of Quantalytics Holdings, LLC., LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of's investment advisory services.

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