Ordinary Dividends Vs. Qualified Dividends

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When it comes to investing in stocks or other securities that pay out dividends, there are two types of dividends you may receive: ordinary dividends and qualified dividends. Qualified dividends receive favorable tax treatment and are taxed at a lower capital gains rate than ordinary dividends. What makes a dividend qualified depends on how long you hold onto the security, along with other criteria established by the IRS.

Let’s start with the basics: A dividend is a portion of a company’s earnings that’s distributed to shareholders. These earnings are usually paid out on a regular basis, such as quarterly, monthly or annually, and can be in the form of cash or additional shares of stock.

Ordinary dividends vs. qualified dividends

Tax brackets for qualified dividends and capital gains

Your income plays a huge role in how your capital gains — and qualified dividends — are taxed. Here’s a quick breakdown of the long-term capital gains tax rates for 2025:

• If your taxable income is $48,350 or less for single filers or $96,700 married filing jointly, some or all of your net capital gain may be taxed at 0 percent.
• If your taxable income is $48,351 to $533,400 for single filers or up to $600,050 for married filers, your tax rate is 15 percent.
• If your taxable income exceeds $533,400 for single filers or $600,050 for married filers, a 20 percent rate applies to the excess.

The gist: Your income determines whether your qualified dividends are taxed at 0 percent, 15 percent or 20 percent, which can significantly impact your tax bill and influence how you save and invest throughout the year.

Qualified dividends criteria

In order for a dividend to qualify for a lower tax rate, it must meet certain criteria set by the IRS:

• The dividend was paid by a domestic or qualified foreign corporation.
• The stock or mutual fund share was held by the investor for the required holding period, typically 61 days for common stock and 91 days for preferred stock.
• The investment is not a real estate investment trust (REIT), master limited partnership (MLP), employee stock option, tax-exempt company or listed with the IRS as an investment that doesn’t qualify.
• The asset was not hedged, which means calls and puts or other derivatives weren’t used.

For more details and the latest guidance, check the IRS website and publications or consult a tax professional, as these criteria may change.

How to know whether dividends are qualified or ordinary

You can find out whether your dividends are qualified or ordinary on the IRS Form 1099-DIV that your broker or trading platform sends you each year. It will have ordinary dividends listed in box 1a and qualified dividends in box 1b.

However, if you’re hoping to find that information per dividend stock, you’ll have to chat with your broker or read through the IRS list for what makes a dividend qualified to see whether the investment meets the requirements. For investors with portfolios that include foreign companies or alternative investments, it will be a little trickier than an investor who focuses on U.S. common stocks. Most major U.S. common stocks will likely count as qualified, as long as you meet the holding period requirement.

Why qualified dividends are taxed differently

The idea behind this tax policy is to encourage long-term investment in the stock market. By offering a lower tax rate on qualified dividends, the government hopes to incentivize investors to hold onto their investments for a longer period of time, which can be beneficial both for the individual investor and for the overall economy.

Bottom line

Let’s recap: The primary difference between ordinary dividends and qualified dividends is how they are taxed. Ordinary dividends are taxed as ordinary income at your regular tax rate, while qualified dividends are taxed at a lower rate, similar to the long-term capital gains tax rate. To qualify for the lower tax rate on qualified dividends, the dividends must meet certain criteria set by the IRS. If you’re still unsure whether your dividend-yielding investments are qualified or ordinary, consult a financial professional for further clarification and advice.

— Bankrate’s Logan Jacoby contributed to an update of this article.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.