Qualified vs. Non-Qualified Dividends: What Investors Need to Know

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When it comes to earning dividends from your investments, understanding the tax implications can make a big difference in your overall returns. Dividends are generally categorized as either qualified or non-qualified, and each type is taxed differently. Here’s a clear breakdown of the key differences:

What Are Qualified Dividends?

Qualified dividends are taxed at the favorable long-term capital gains tax rates, which are typically lower than ordinary income tax rates.
To be classified as qualified, dividends must meet specific requirements:

  • Issuer Requirements: The dividend must be paid by a U.S. corporation or a qualified foreign corporation.
  • Holding Period Requirement: Investors must have held the underlying stock for more than 60 days during the 121-day period that begins 60 days before the stock’s ex-dividend date.

Because of these conditions, qualified dividends can be a tax-efficient way to earn investment income, potentially reducing your overall tax burden.

What Are Non-Qualified Dividends?

Non-qualified dividends (sometimes referred to as ordinary dividends) do not meet the requirements to be taxed at the lower long-term capital gains rates.
Instead, they are taxed at your ordinary income tax rate, which can be significantly higher depending on your income bracket.

Common examples of non-qualified dividends include dividends from:

  • Real estate investment trusts (REITs)
  • Master limited partnerships (MLPs)
  • Certain foreign corporations

Why It Matters

Understanding whether your dividends are qualified or non-qualified can have a major impact on your after-tax investment returns.
By holding investments that pay qualified dividends — and by meeting the required holding periods — you can benefit from lower tax rates and enhance your portfolio’s tax efficiency.

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