Qualified Dividend

What Is a Qualified Dividend?

A dividend is a payment a company makes to its shareholders, usually out of profits. In the United States, most dividends are taxed as ordinary income. A qualified dividend is a special category that meets certain requirements and is taxed at the lower rates that apply to long-term capital gains instead.

How It Works

Two main conditions must be met. First, the dividend generally has to be paid by a U.S. corporation or by a qualifying foreign corporation, such as one located in a country with a qualifying U.S. tax treaty or one whose shares trade on a major U.S. exchange. Second, the shareholder must have held the stock for a minimum period around the ex-dividend date. For common stock, this generally means owning the shares for more than 60 days within the 121-day period that begins 60 days before the ex-dividend date. A longer holding requirement applies to certain preferred stock.

Some payments are generally not qualified, including most dividends from a real estate investment trust (REIT) and certain other payers.

Why It Matters to Investors

The difference between the two tax treatments can be significant, because ordinary income rates can be higher than long-term capital gains rates at many income levels. Actual rates depend on a taxpayer's total taxable income and filing status, and they change over time, so current IRS publications are the authoritative reference. Brokers report dividend income on Form 1099-DIV, which shows total ordinary dividends and separately lists the portion that is qualified. Investors reviewing their tax documents can use that breakdown to see how much of their dividend income may receive the preferential treatment.

Qualification is not automatic for every dividend, and the rules can be complex. Tax professionals or official IRS guidance can help clarify how the rules apply to a specific situation.