What is the difference between qualified dividends and ordinary dividends?
Taxes rates differ between qualified dividends and ordinary dividends
A reader of one of our 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 criteria are met, the dividend becomes qualified and is taxed at long-term capital gain rates. Long-term capital gain rates are lower than the rates on ordinary income.
If certain criteria 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. Among others, real estate investment trusts, master limited partnerships, money market funds and many foreign corporations 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. When you give someone $20 in cash, your net worth declines by $20. Similarly, when a company pays a dividend, the value of the enterprise drops 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 a 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?
Making News…
We continue to help various media outlets provide sound information to their audiences. (Some links may require a subscription to view.)
Dan Moisand,CFP® continues to write for Florida Today and MarketWatch, which are sometimes syndicated to other sites such as YahooFinance.
Can I use investment losses to offset taxes on an IRA withdrawal? – MarketWatch
I have a huge tax bill because of capital gains. Could there be a mistake? – MarketWatch
A flood wiped out my employer, can I tap into my Roth or regular IRA without penalty? – MarketWatch
Financial Q&A: What’s the right time of life to invest in age-based funds? – Florida Today
With Trump back, are Roth conversions less attractive? – MarketWatch
In the News…
(l-r) DJ & Tiffany Hunt, Derrick Chandler, Rosa Uy, Dan & Kelly Moisand
Moisand Fitzgerald Tamayo, LLC has supported the growth of pro bono work in financial planning for many years in various ways, particularly through support for the Foundation for Financial Planning, the only organization solely devoted to expanding access to pro bono financial planning for people in crisis or need. On April 2nd, Derrick Chandler, CFP®, DJ Hunt, CFP®, and Dan Moisand,CFP® represented the firm at the Foundation’s 30th Anniversary gala at the Library of Congress
Dan Moisand,CFP® has joined the Board of Directors of the Academy of Financial Services. The AFS is a global academic membership organization comprised of professors, students and financial planning practitioners focused on research and teaching standards, and those interested in the role of research to improve professional standards. Dan, a former Practitioner Editor of the Journal of Financial Planning has always championed strengthening the connection between the practitioner and academic communities.
Dan also hit the road speaking at the T3 technology conference in Dallas on the ethical considerations of employing artificial intelligence capabilities when giving advice. Shortly thereafter, he spoke to students at his alma mater Florida State University as part of their Closing Bell speaker series.
If you are a member of an organization in need of a personal finance speaker, we are happy to talk with your group’s organizers about helping out at no cost.
Tommy Lucas, CFP®, EA provided financial tips for assisted CNBC reporters on the following topics, a couple of which were syndicated to NBC affiliates:
Converting your home to a rental could trigger a ‘tax bomb’ when you sell, advisor says – CNBC
Here’s the ‘quick and dirty’ way to withhold enough taxes from your paycheck, advisor says – CNBC
‘You’re running out of time’ to claim an IRS stimulus check, tax expert says – NBC10 Philadelphia
Charlie Fitzgerald, CFP® added his thoughts to a CNBC article How investors can ready their portfolios for a recession: ‘You’re looking for balance,’ expert says – CNBC
Notable
Average parental contribution to child’s education for 2023-2024 academic year was $14,282 (Sallie Mae)
49% of undergraduate families borrowed to cover education costs for 2023-2024 academic year (Sallie Mae)
63% of American workers say financial stress has negatively affected their productivity at work (NAPFA)
