Qualified Dividends
Authority: IRC §1(h)(11)
Qualified dividends are dividends from U.S. corporations and eligible foreign corporations that are taxed at the favorable long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates of up to 37%. To qualify, the shareholder must hold the stock for more than 60 days during the 121-day window surrounding the ex-dividend date, which prevents buying a stock just to capture a tax-favored payout. Dividends that never qualify include REIT dividends (though they may get the 20% QBI-style deduction for qualified REIT dividends), most money market and bond fund distributions, and dividends on shares the taxpayer has hedged. High earners also owe the 3.8% net investment income tax on top. On a 1099-DIV, box 1a is total ordinary dividends and box 1b is the qualified portion; the gap between them is taxed at full ordinary rates.
Example
An investor in the 15% capital gains bracket receives $10,000 of dividends: $8,500 qualified and $1,500 from a bond fund. She pays $1,275 on the qualified portion and ordinary rates, say 32%, or $480, on the rest.
Related terms
Long-Term Capital Gains
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Net Investment Income Tax (NIIT)
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C Corporation
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