Qualified dividends: what they are and how they’re taxed
Qualified dividends are a type of dividend income that the IRS taxes at lower long-term capital gains rates — 0%, 15%, or 20%, depending on filing status and taxable income — rather than as ordinary income. To qualify, a dividend must be paid by a domestic or qualified foreign corporation and meet a minimum holding period set by the IRS.
What makes a dividend qualified?
Not all dividends receive the same tax treatment. The IRS distinguishes between qualified and ordinary dividends based on two criteria:
- Source. The dividend must be paid by a U.S. corporation or a qualified foreign corporation that trades on a major U.S. stock exchange or is incorporated in a U.S. possession.
- Holding period. The investor needs to hold the stock for a minimum period around the ex-dividend date — the first date a stock trades without entitlement to the upcoming dividend.
If dividends don’t meet both requirements, they’re classified as ordinary dividends and taxed as regular income.
Qualified vs. ordinary dividends
| Qualified dividends | Ordinary dividends | |
| Tax rate | 0%, 15%, or 20% (long-term capital gains rates; depending on filing status and taxable income) | Taxed as ordinary income (up to 37%) |
| Source requirement | Domestic or qualified foreign corporation | Any corporation or fund |
| Holding period | Required | Not required |
| Reported on | Form 1099-DIV, Box 1b | Form 1099-DIV, Box 1a |
| Common examples | Most U.S. stock dividends | REIT dividends, MLP distributions, money market dividends |
Holding period requirements
To qualify for the lower rate, investors need to hold the stock for a minimum period around the ex-dividend date.
- Common stocks: Holding for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date qualifies the dividend.
- Preferred stocks: Holding for more than 90 days during the 181-day period beginning 90 days before the ex-dividend date qualifies the dividend.
The same holding period rules apply to mutual funds that pay qualified dividends.
Qualified dividends tax rate
The IRS taxes qualified dividends at the same rates as long-term capital gains: 0%, 15%, or 20%, depending on taxable income and filing status. For current income thresholds by filing status, see IRS Topic 409.
The 15% rate applies to a wide range of taxable income levels — see IRS Topic 409 for current thresholds by filing status. Investors in lower income brackets may qualify for a 0% rate. Higher-income investors may also owe the Net Investment Income Tax (NIIT) of 3.8% on investment income above certain thresholds, per IRS Publication 550.
What doesn’t qualify
According to the IRS, the following are typically taxed as ordinary income regardless of holding period:
- Dividends from real estate investment trusts (REITs)
- Distributions from master limited partnerships (MLPs)
- Dividends paid on employee stock options
- Dividends from tax-exempt organizations
- Dividends that don’t meet the holding period requirement
How qualified dividend taxes vary by account type and income
Dividend tax treatment differs depending on account type, holding period, and income level. A qualified tax professional can evaluate what applies to your situation.
- Holding period affects tax classification. Dividends held long enough to meet IRS requirements are taxed at the lower capital gains rate rather than as ordinary income.
- Account type determines when dividends are taxed. Dividends earned inside a traditional IRA, Roth IRA, or 401(k) aren’t taxed in the year received. In a Roth account, qualified withdrawals in retirement may be tax-free.
- Realized losses may offset dividend income. Capital losses realized before year-end may offset gains — though the benefit depends on individual circumstances. Note: the IRS wash sale rule disallows a loss if a substantially identical security is repurchased within 30 days before or after the sale.
Income level determines the applicable rate. Investors with lower taxable income may owe 0% on qualified dividends depending on total taxable income and filing status. See IRS Topic 409 for current thresholds.
How M1 handles dividend investing
M1 offers flexible dividend handling — clients can choose how dividends are applied at the portfolio or individual security level. By default, cash dividends are added to your account’s cash balance and invested according to your Auto-Invest settings.
Alternatively, dividends of $1 or more can be automatically reinvested back into the security that paid them, or swept into the High-Yield Cash Account (available for general margin accounts only).
M1’s dividend income tracker shows paid, pending, and estimated dividend income across your portfolio.
For full details, see M1 Help Center Articles – Dividends on M1 and Dividend handling.
Frequently asked questions about qualified dividends
Qualified dividends meet IRS requirements — paid by a domestic or qualified foreign corporation and held for the required period — and are taxed at the lower long-term capital gains rate (0%, 15%, or 20%). Ordinary dividends don’t meet these requirements and are taxed as regular income, which may be at a higher rate depending on income bracket.
This information is for educational purposes only and does not constitute tax or financial advice.
The IRS taxes qualified dividends at long-term capital gains rates: 0%, 15%, or 20%, depending on taxable income and filing status. Some higher-income investors may also owe the 3.8% Net Investment Income Tax. For current income thresholds, see IRS Topic 409.
Tax laws are subject to change. Consult a qualified tax professional for advice tailored to your situation.
Your brokerage reports qualified dividends separately on your year-end Form 1099-DIV in Box 1b. Total dividends received appear in Box 1a. If Box 1b shows a figure greater than zero, you received qualified dividends for that tax year.
This information is for educational purposes only and does not constitute tax advice.
Dividends earned inside a traditional IRA or Roth IRA aren’t taxed in the year received, regardless of whether they’re qualified or ordinary. The qualified/ordinary distinction matters for taxable brokerage accounts. In a Roth IRA, qualified withdrawals in retirement may be tax-free — the requirements for Roth withdrawals are separate from the dividend qualification rules.
Tax treatment depends on individual circumstances. Consult a qualified tax professional.
This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are subject to change. Consult a qualified tax professional for advice tailored to your individual circumstances. Investing involves risk, including the possible loss of principal.
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