Qualified dividends are a category of dividend payments that receive favorable tax treatment when certain conditions are met. Unlike ordinary dividends, which are taxed as regular income, qualified dividends are subject to the lower long-term capital gains tax rates. To qualify, the dividends must be paid by a U.S. corporation or an eligible foreign company, and the investor must meet specific holding period requirements. These rules were introduced in the early 2000s as part of tax reform efforts aimed at encouraging long-term investment.
Consider speaking with a financial advisor before you begin investing or make a major financial decision.
What Is a Qualified Dividend?
A dividend is a way for a company or fund to distribute payments to its investors. These typically come in the form of cash and on a quarterly basis. However, it is also possible for a corporation to offer other assets, such as stocks, property or even services.
These earnings were established as part of the 2003 tax cuts that former President George W. Bush signed into law. In particular, the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) created them. Up until then, all dividends were were treated as ordinary dividends and taxed at the investor’s marginal tax rate.
How Qualified Dividends Work
Dividends are rewards for corporate or mutual fund investors. So, you have to become a shareholder of a qualifying and domestically-based company to earn them. If you are an investor, you will receive a dividend from the company whose shares you own. However, these dividends are designed for long-term stockholders.
For a dividend to be qualified, you must hold it for more than 60 days. This must occur over a 121-day period starting 60 days before the ex-dividend date.
That must take place over a 121-day period beginning 60 days out from the ex-dividend date. This date is the cutoff point for you to purchase a stock and receive a dividend from it. In contrast, if you hold dividends from a mutual fund, you have slightly different rules. You must hold the security unhedged for a minimum of 61 days out of the 121 days.
While the process may sound confusing, most dividends are considered qualified from U.S. companies. Essentially, if you keep the stock for a few months, you’ll probably earn the qualified rate.
Qualified Dividends Requirements
There are some criteria that each dividend must meet to become qualified. The Internal Revenue Service (IRS) determines and outlines these rules. Meeting these requirements entitles you to lower taxes on your dividends.
- NYSE eligible: The company or entity paying the dividend must be a domestic or qualified foreign corporation that trades on the New York Stock Exchange. These foreign companies have their own set of guidelines to qualify.
- Ordinary dividends: The distributions must be ordinary dividends. They cannot be capital gains distributions or come from tax-exempt entities.
- Holding period: They must meet the minimum necessary holding period. Common stocks and preferred stocks have different holding period lengths.
Certain investments do not pay you in qualified dividends. For example, real estate investment trusts (REITs) and master limited partnerships (MLPs) do not usually distribute qualified dividends to their investors.
Qualified Dividend Tax Benefits
Qualified dividends are taxed differently than normal dividends. The former are taxed at the long-term capital gains rate, which tops out at 20%. Here’s how qualified dividends will be taxed in 2025, as well as how those rates compare to how qualified dividends were taxed in 2024:
2025 Qualified Dividend Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | $0 – $48,350 | $0 – $96,700 | $0 – $48,350 | $0 – $64,750 |
| 15% | $48,350 – $533,400 | $96,700 – $600,050 | $48,350 – $300,000 | $64,750 – $566,700 |
| 20% | $533,400+ | $600,050+ | $300,000+ | $566,700+ |
2024 Qualified Dividend Tax Rates
| Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | $0 – $47,025 | $0 – $94,055 | $0 – $47,025 | $0 – $63,000 |
| 15% | $47,025 – $518,900 | $94,055 – $583,750 | $47,025 – $291,850 | $63,000 – $551,350 |
| 20% | $518,900+ | $583,750+ | $291,850+ | $551,350+ |
Ordinary Dividends vs. Qualified Dividends
There are two forms of dividends: ordinary and qualified. Ordinary, or non-qualified, dividends are much more common than their counterparts. Just like qualified dividends, they are paid out from a company or corporation’s earnings to its stockholders. These payments tend to come from sources outside of stocks, though. Examples of this include savings accounts, certificates of deposit and REITs. Reporting an ordinary dividend is a little different from a qualified dividend since it is not taxed in the same way.
You report any income from an ordinary dividend in box 1a on the 1099-DIV form, just like you would any income. So, it’s taxed like the wages you earn from your job. If you receive more than $1,500 in these ordinary dividends, though, you have to use another form called Schedule B (Form 1040), Interest and Ordinary Dividends.
In comparison, qualified dividends are taxed as long-term capital gains instead of regular income. This taxation comes at lower rates. For example, look at the 2023 tax year brackets. Single filers and joint filers alike can pay from 10% to 37% on ordinary income, whereas the capital gains rate caps at 20%. Remember, your qualified dividends are also reported on the 1099-DIV form but in box 1b.
What Qualified Dividends Mean to You
If you’re not yet a shareholder, then a qualified dividend doesn’t mean much to you. However, if you are considering opening a portfolio or becoming an investor, it may incentivize you. A qualified dividend comes with favorable tax benefits that appeal to both the stockholder and the company distributing them.
You can continue to reduce your taxes on your qualified distributions. For example, you can offset your capital gains through tax-loss harvesting. Or, you can put your investments in a tax-deferred investment account, like an IRA or 401(k). Many people use these dividends to support their retirement income. You do not have to pay annual taxes on income held in a retirement account, which helps you reduce tax drag. So, reinvesting may be a valuable option.
However, it’s important to know how long a company may pay you dividends since it likely will not have a guaranteed term.
Bottom Line
Qualified dividends are a way to reward long-term shareholders. They are taxed at a lower rate than ordinary dividends, giving them a tax benefit status. You can increase your dividend income by putting it in a retirement account for when you’re retired. If you want to incorporate qualified dividends into your income, consider speaking with a financial advisor. They can help you create a plan that adjusts accordingly to your goals.
Tips for Building Retirement Savings
- Saving for retirement is a vital step in every adult’s life, but getting started may feel overwhelming That’s where a fiduciary financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goal, get started now.
- You’ll need to create a budget that can accommodate both your retirement needs and wants. Consider the steps you may have to take to make your retirement savings last.
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