Qualified and ordinary dividends are reported in separate boxes on Internal Revenue Service Form 1099-DIV. Total ordinary dividends are reported in box 1a, and qualified dividends in box 1b. The two types of dividends are treated differently for tax purposes.
Ordinary dividends include both qualified and non-qualified dividends, but the IRS separates these on tax returns by effectively subtracting qualified dividends from all ordinary dividends, with non-qualified dividends implicitly making up the balance. Qualified dividends may be taxed at a more favorable rate than non-qualified dividends, which are taxed as ordinary income.
Key Takeaways
- Qualified dividends are taxed at capital gains rates rather than ordinary income-tax rates, which are higher for most taxpayers.
- If the payment is not classified as a qualified dividend, it is a non-qualified dividend.
- Ordinary dividends, for tax purposes, includes both qualified and non-qualified dividends received.
- Generally, dividends of common stocks bought on U.S. exchanges and held by the investor for at least 60 days are "qualified" for the lower rate.
What Are Qualified Dividends?
Qualified dividends are those that are taxed at capital gains rates, as opposed to income-tax rates, which are higher for most taxpayers. To qualify, they must be generated by stocks issued by U.S.-based corporations or foreign corporations that trade on major U.S. stock exchanges, such as the NASDAQ and NYSE.
The rule applies to dividends from money-market funds, net short-term capital gains from mutual funds, and other distributions on the stock.
The stocks must be held for at least 60 days within a 121-day period that begins 60 days before the ex-dividend date, which is the first date following the declaration of a dividend on which the holder is not entitled to the next dividend payment. The number of days includes the day the recipient sold the stock but not the day it was acquired, and days during which the stockholder's "risk of loss was diminished" may not be counted, according to IRS rules.
Applicable Tax Rates
Dividends that meet these criteria are taxed at the long-term capital gains rate, which ranges from 15% to 20%.
The rate is 0% on qualified dividends for investors with ordinary income that is taxed at 10% or 12%. Those with income-tax rates greater than 12% and up to 35%, for ordinary incomes of up to $459,750 for single filers in 2022 (increasing to $492,300 for 2023), are taxed at 15% on qualified dividends. The rate is capped at 20% for individuals in the 35% or 37% tax brackets and with ordinary income exceeding $459,750 for single filers in 2022 (increasing to $492,300 for 2023).
What Are Non-Qualified Dividends?
Non-qualified dividends are those that do not meet the above criteria. Investors pay tax on these dividends at their ordinary income-tax rates. For tax years 2022 and 2023, tax rates range from 10% to 37%. Investors with an adjusted gross income of $200,000, or $250,000 for joint filers, pay an additional 3.8% tax net investment income tax on dividend income. At the same thresholds, they also pay a 0.9% Medicare tax.
Implications for Retirement Accounts
People who include dividend-paying stocks in their retirement investment accounts, such as 401(k) accounts, do not pay taxes on dividends until they begin taking distributions on the funds.
People with Roth IRAs enjoy the greatest tax benefit because distributions from the accounts are typically tax-free, assuming the account holder follows the rules for Roth IRA distributions.
Correction—April 3, 2022: A previous version of this article incorrectly labeled ordinary dividends as non-qualified dividends only. Ordinary dividends, for IRS purposes, include both qualified and non-qualified dividends.
FAQs
Qualified dividends are all or a portion of the total ordinary dividends. They're reported in box 1a on Form 1099-DIV. While this sounds complicated, your financial institution should specify which dividends are qualified when they report your dividends to you on Form 1099-DIV. Qualified dividends appear in box 1b.
Do I include qualified dividends as ordinary dividends? ›
Qualified dividends are a subset of your ordinary dividends. Qualified dividends are taxed at the same tax rate that applies to net long-term capital gains, while non-qualified dividends are taxed at ordinary income rates. It is possible that all of your ordinary dividends are also qualified dividends.
Do you subtract qualified dividends from taxable income? ›
Qualified dividends are thus included in a taxpayer's adjusted gross income; however, these are taxed at a lower rate than ordinary dividends.
How do I report qualified dividends on taxes? ›
Qualified dividends are reported on Form 1099-DIV in line 1b or column 1b. However, not all dividends reported on those lines may have met the holding period requirement. Those non-qualified dividends, as well as other ordinary dividends, may be taxed at your ordinary income tax rate, which can be as high as 37%.
Are qualified dividends included on line 3b? ›
On Form 1040, line 3a, qualified dividends, is the sum of box 1b on all of your 1099-DIV forms, and Form 1040 line 3b is the sum of box 1a on all of your 1099-DIV forms. Form 1040 line 3b includes the amount on line 3a.
Are qualified dividends included in ordinary dividends on 1099 Div? ›
Box 1a of your 1099-DIV will report the total amount of ordinary dividends you receive. Box 1b reports the portion of box 1a that is considered to be qualified dividends. If your investment makes a reportable capital gain distribution to you, it will be reported in box 2a.
What are the IRS rules for qualified dividends? ›
A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date.2 The ex-dividend date is one market day before the dividend's record date.
How do I report ordinary and qualified dividends on 1040? ›
Ordinary dividends are reported on Line 3b. Qualified dividends are reported on Line 3a.
What is the difference between qualified and ordinary dividends on 1040? ›
The most significant difference between the two is that ordinary dividends are taxed at ordinary income rates, while qualified dividends receive more favorable tax treatment by being taxed at lower capital gains rates. If your ordinary income is taxed at 10-12%, the tax rate is 0% on qualified dividends.
Do qualified dividends affect your tax bracket? ›
Qualified dividends are taxed at capital gain rates of 0%, 15%, or 20%, depending on your tax bracket. If you are: In the 10% or 12% tax bracket, your qualified dividends are taxed at 0%, In the 22%, 24%, 32%, or 35% tax bracket, your qualified dividends are taxed at 15%, and.
Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. The payer of the dividend is required to correctly identify each type and amount of dividend for you when reporting them on your Form 1099-DIV for tax purposes.
What is the federal tax treatment of ordinary dividends? ›
The tax rates for ordinary dividends are the same as standard federal income tax rates; 10% to 37%.
Do dividends count as income for Social Security? ›
Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.
Do I need to fill out a qualified dividends and capital gain tax worksheet? ›
It asks about qualified dividends. If you have those, you'll need to fill out the Qualified Dividends and Capital Gains Tax Worksheet next. Otherwise, you're done with Schedule D, and you'll be paying ordinary income taxes on everything on line 7 because those are short-term gains.
Are qualified dividends included in adjusted gross income? ›
Adjusted gross income, also known as (AGI), is defined as total income minus deductions, or "adjustments" to income that you are eligible to take. Gross income includes wages, dividends, capital gains, business and retirement income as well as all other forms income.
Do I report qualified dividends on Schedule B? ›
Enter the amount of qualified dividends you received on line 5 of Schedule B. Enter the amount of ordinary dividends you received on line 6 of Schedule B. Add the amounts on lines 1, 5, and 6. If the total is over $1,500, you must complete Part III of Schedule B.
Can I report qualified dividends as ordinary? ›
Qualified dividends are taxed at capital gains rates rather than ordinary income-tax rates, which are higher for most taxpayers. If the payment is not classified as a qualified dividend, it is a non-qualified dividend. Ordinary dividends, for tax purposes, includes both qualified and non-qualified dividends received.
What is the treatment for qualified dividends? ›
The tax treatment of dividends in the U.S. depends on whether the Internal Revenue Code classifies them as qualified or ordinary dividends. Qualified dividends are taxed at the same rates as the capital gains tax rate, which is lower than ordinary income tax rates.
Can you elect to treat qualified dividends as ordinary income? ›
Qualified dividends that receive preferential tax treatment aren't considered investment income for these purposes. However, you can opt to have your qualified dividends treated as ordinary income.
