Qualified Dividends

Dividends are payments made by corporations to their shareholders, typically from the company's earnings. For tax purposes, dividends are classified as either "qualified" or "ordinary" (also called "non-qualified"). The classification matters because qualified dividends are taxed at the preferential long-term capital gains rates, while ordinary dividends are taxed at your regular income tax rate, which may be significantly higher.

For a dividend to be classified as qualified, it must meet two main requirements. First, it must be paid by a U.S. corporation or a qualifying foreign corporation. Second, you must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. For preferred stock, the holding period requirement is longer (90 days within a 181-day window).

The tax rates on qualified dividends mirror the long-term capital gains tax brackets. For 2025, the rate is 0% for taxable income up to approximately $48,350 (single) or $96,700 (married filing jointly), 15% for income above those levels up to higher thresholds, and 20% for the highest income levels. Additionally, the 3.8% Net Investment Income Tax may apply for higher-income taxpayers, bringing the effective top rate to 23.8%.

Common sources of non-qualified (ordinary) dividends include real estate investment trusts (REITs), master limited partnerships (MLPs), money market funds, and dividends on stock held for less than the required period. Understanding which of your investments generate qualified versus ordinary dividends may help you make more informed decisions about asset location, placing investments with ordinary dividends in tax-advantaged accounts where possible.

For retirees living on investment income, the distinction between qualified and ordinary dividends can have a meaningful impact on annual tax liability. It may also affect provisional income calculations for Social Security taxation and IRMAA thresholds for Medicare premiums.