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Qualified vs. non-qualified (ordinary) dividends
Companies with publicly traded stock share portions of their income with investors through qualified and non-qualified dividends. Understanding the difference can help investors better understand how dividend income may be taxed.
Key takeaways:
- Dividends are a common form of investment income.
- How a dividend is taxed depends on factors like the type of company and how long you’ve owned the stock.
- Dividend type plays a role in how much you may owe in taxes.
What are dividends?
Dividends are payments a publicly traded companies make to their shareholders, typically from their profits. They may be paid in cash or as additional shares and can provide investors with a steady source of income.
Not all companies pay dividends, but those that do may distribute them on a regular schedule—such as quarterly—or as special one-time payments. Two main categories of dividends are qualified and non-qualified. Some investors use dividend-paying investments as one potential part of comprehensive retirement strategy, although dividend payments are not guaranteed and may change over time.
What is a qualified dividend?
A qualified dividend is a dividend that receives favorable tax treatment based on meeting certain IRS requirements.
Qualified dividend example
Generally, dividends paid by certain U.S. corporations and qualified foreign corporations may be treated as qualified dividends if IRS holding-period and other requirements are met.
What are non-qualified dividends?
Any dividends that do not meet the IRS requirements for qualified dividends are considered ordinary or non-qualified dividends.
Non-qualified dividend example
Dividends that do not meet IRS requirements for qualified dividend treatment are generally considered ordinary (non-qualified) dividends.
Ordinary dividends vs. qualified dividends
Understanding the difference between the two types of dividends can help you better interpret your investment income and potential tax liability. Of course, tax treatment depends on an individual's circumstances.
|
Meets IRS criteria |
Does not meet IRS criteria |
|
|
U.S. companies and qualified foreign companies |
Certain foreign companies, short-term holdings, special dividends |
|
|
Yes |
Not required |
|
|
More favorable tax rate like capital gains |
Taxed as ordinary income |
What is the tax rate on qualified and non-qualified dividends?
Qualified and non-qualified dividends are taxed differently, with qualified dividends generally receiving more favorable tax treatment than non-qualified dividends. You can explore a full breakdown in our article How are dividends taxed?
Qualified and non-qualified dividends are not created equal. Knowing the difference can help you better understand your income sources and how they fit into your broader financial strategy.
Qualified vs. non-qualified dividends FAQs
The IRS considers all dividends to be ordinary, and then applies certain criteria, which when met earn the dividend qualified status.
The classification of dividends is determined by IRS requirements, including the type of company that issues them and the amount of time the investor held shares in the company.
The company that issues the dividend is required to report the type of dividend they issue on Form 1099-DIV, which they send you once a dividend has been issued.
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Planning your investment strategy?
A New York Life financial professional can answer your questions and help you determine available options and how to choose the best path forward.
Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.