What is the difference between qualified dividends and ordinary dividends?

Taxes rates differ between qualified dividends and ordinary dividends

A reader of one of Dan’s MarketWatch columns asked why there were two kinds of dividends on his tax return, “ordinary” and “qualified.” The short answer is dividends are categorized as either ordinary or qualified to determine the tax rate applied to the dividend.

When corporations have profits, they can reinvest those funds into growing their operation or pay a portion out to their shareholders. These payments are ordinary dividends. If certain qualifications are met, the dividend becomes qualified and is taxed at long-term capital gain rates.  Long-term capital gain rates are lower than the rate on ordinary income.

If certain qualifications are met, the dividend becomes qualified and is taxed at long-term capital gain rates. 

There are two primary issues that determine whether a dividend is qualified. First, is the corporation paying the dividend. U.S. corporations whose shares are publicly traded will typically have dividends eligible to be treated as qualified. Real estate investment trusts, master limited partnerships, money market funds and many foreign corporations among others are not eligible for the favorable tax treatment.

The second qualification is that the shareholder receiving the dividend must hold the shares for at least 61 days within a 121-day period that begins 60 days before the ex-dividend date. Just as your net worth declines by $20 if you give someone $20 in cash, when a company pays a dividend, it lowers the value of enterprise by the amount of the dividend. Set by the board of directors, the ex-dividend date is the date when the value of the shares is reduced to reflect the dividend payable.

This can be confusing, but you do not need to track it. Brokerage firms are required to track the ex-dividend dates and holding periods. They will report the amounts of ordinary and qualified dividends on Form 1099-DIV.

As mentioned, when a dividend is qualified, it is taxed at the applicable long-term capital gain rate. In 2025, to the extent that taxable income is under $48,350 for single filers or $96,700 for joint filers, that long term capital gains rate is zero. For single filers with Modified Adjusted Gross Income (MAGI) of more than $200,000 or couple with MAGI over $250,000, the rate can be as high as 23.8%. Whatever the rate, the long-term capital gain rate will be lower than the ordinary rate at the same income.

Lower taxes sound great. Would it be good to load up on dividend paying stocks? No. Every portfolio should own some dividend paying stocks, but it is better to be much more broadly diversified than to concentrate our holdings in dividend paying stocks. Today, most companies do not pay dividends because dividends are paid after taxes are levied at the corporate level and are not deductible to the corporation. Many companies instead prefer to reinvest their cash to grow or maintain the value of the business.

For more thoughts on the role of dividend paying stocks see:

Is now the time to move into dividend paying stocks?

With interest rates low, should I buy dividend paying stocks instead of bonds?

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