Qualified Dividend
A dividend that meets IRS criteria to be taxed at the lower long-term capital gains rate rather than ordinary income rates.
What is Qualified Dividend?
Qualified dividends are dividends paid by US corporations (or qualified foreign corporations) on stock held for a minimum holding period — generally more than 60 days during the 121-day period surrounding the ex-dividend date. Because they meet the IRS qualification criteria, they are taxed at the lower long-term capital gains tax rates (0%, 15%, or 20% depending on income) rather than at the higher ordinary income rates (up to 37%). Non-qualified (ordinary) dividends from REITs, money market funds, short-term holdings, and certain foreign corporations are taxed as ordinary income. Most dividends from common US blue-chip stocks are qualified, while REIT dividends are generally not.
Example
An investor in the 22% ordinary income bracket receives $5,000 in dividends — $4,000 from Apple (qualified) and $1,000 from a REIT (non-qualified). The Apple dividends are taxed at 15% (qualified rate) = $600 in tax. The REIT dividends are taxed at 22% (ordinary rate) = $220. Total tax: $820. Without the qualified dividend distinction, all $5,000 would have been taxed at 22% = $1,100.