Qualified dividend
Also known as: Qualified dividends, Qualified vs ordinary dividend
A dividend that meets specific IRS holding-period and source requirements and qualifies for the preferential long-term capital gains tax rate (0%, 15%, or 20%) instead of the higher ordinary income rate. Reported on Form 1099-DIV box 1b — the subset of total dividends in box 1a that qualified.
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Dividend payments fall into two categories for US federal tax purposes: qualified and non-qualified (ordinary). Qualified dividends meet two IRS tests and receive the preferential long-term capital gains tax rate — the same 0%/15%/20% brackets that apply to long-term capital gains. Non-qualified dividends are taxed at the filer's ordinary income tax rate, which for typical middle-income filers is 22% or 24% — substantially higher than the 15% LTCG rate. The rate differential is one of the largest after-tax return differences across asset classes that ordinary investors encounter.
The two qualifying tests: the dividend must be paid by a US corporation or a qualifying foreign corporation (most large foreign companies that trade ADRs on US exchanges qualify; some emerging-market issuers do not), AND the investor must have held the underlying shares for more than 60 days during the 121-day window centered on the ex-dividend date. The second test exists to prevent dividend-stripping (buying just before the ex-date, capturing the dividend at the preferential rate, and selling immediately). Investors who hold for the typical multi-year horizon meet the holding test automatically; active traders may have specific dividends classified as non-qualified if their holding period falls short.
Most dividends from common stock of large US companies and from US-domiciled equity mutual funds and ETFs are qualified — assuming the investor holds long enough. The major exceptions: REIT dividends are almost always non-qualified (the REIT pass-through structure means the entity is not paying corporate tax on the underlying income, so the IRS does not provide a second layer of preferential treatment at the dividend), BDC dividends are usually non-qualified, MLP distributions are not dividends at all (they are return of capital and partnership income with their own treatment), and money market fund 'dividends' are interest, taxed at ordinary rates regardless of holding period.
The 1099-DIV form a brokerage issues each January shows the split. Box 1a is total ordinary dividends — every dividend the broker paid the investor during the year. Box 1b is qualified dividends — the subset of box 1a that meets the IRS qualification tests, including the holding-period test the broker tracks for the investor. The taxable portion that flows up to Form 1040 line 3a is box 1b (qualified, preferential rate); line 3b is box 1a (total, used for AGI). For tax planning purposes, the ratio of box 1b to box 1a tells the investor how much of their dividend income enjoyed the preferential rate that year. A heavy-REIT or heavy-BDC portfolio may have qualified ratios below 50%; a diversified large-cap US index portfolio typically has qualified ratios above 95%.
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- Capital gains tax rate Federal tax rates that apply to profits from selling assets held in a taxable account. Long-term gains (held >1 year) are taxed at preferential rates (0%, 15%, or 20% depending on income); short-term gains (≤1 year) are taxed as ordinary income at marginal brackets.
- NIIT (Net Investment Income Tax) A 3.8% federal surtax on investment income for higher-income filers, enacted in 2013 to fund the Affordable Care Act. Applies on top of regular capital gains and dividend tax when modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). Thresholds are not indexed for inflation.
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