Qualified dividends are ordinary dividends that receive preferential tax rates for U.S. individual taxpayers.
Qualified dividends are subject to the same tax rates as long-term capital gains, which are either 0%, 15%, or 20%, depending upon the individual’s taxable income for the year.
For a dividend distribution to be a qualified dividend, the following requirements must be met:
- The dividend is paid from a domestic U.S. corporation or a qualified foreign corporation. A qualified foreign corporation includes a corporation in a U.S. territory, a corporation eligible for income tax treaty benefits, or a corporation whose shares are publicly traded on an established securities market in the U.S.;
- The dividend distribution is NOT specifically identified as not a qualified dividend; and
- The shareholder meets the holding period.
Qualified Dividend Income Holding Period
For the individual taxpayer to treat the dividend distribution on common stock as qualified dividend income, the taxpayer must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Example Qualified Dividend Timing
John Doe purchased 1,000 shares of common stock in XYZ Corporation, a publicly traded entity, on May 1, 2023.
On June 27, 2023, the corporation’s board of directors declared a dividend of $1 per share. The board set the record date as July 7, 2023. The ex-dividend date is usually one business day before the record date, which is July 6, 2023. The dividend payable date is set for July 21, 2023.
John Doe did not sell any of his stock during the 2023 tax year. On July 21, 2023, he received a dividend of $1,000 (1,000 shares times $1 per share). John wants to determine what portion, if any, of the dividend distribution is qualified dividend income.
In order for John to treat the dividend income as qualified, he must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
The ex-dividend date was July 6, 2023, which means the 60th day prior would be May 7, 2023. John must have held the shares for at least 60 days during the 121-day window from May 7, 2023, to September 5, 2023.
Seeing how John purchased the shares on May 1, 2023, and has held the stock throughout the 2023 tax year, he has held the stock for more than 60 days during the 121-day window.
Form 1040 Income Tax Reporting
Individual taxpayers report all dividend income (qualified and nonqualified dividends) on Schedule B (Interest & Dividends). The taxpayer separately reports the qualified dividend income on Page 1 of Form 1040, Line 3a for Qualified Dividends.
In order to calculate the preferential tax rate, the taxpayer should complete the Qualified Dividends and Capital Gains Tax Worksheet (QDCGTW) found in the Schedule D Instructions.
Additional Information
Taxpayers can find more information about the taxation of investment income by reviewing IRS Publication 550 (Investment Income and Expenses).