When corporations pay dividends, their shareholders often must pay taxes on those dividends. The tax rates they pay depend not only on their own tax brackets but also on whether the dividends are “qualified dividends.”
“Essentially qualified dividends are taxed at the lower long-term capital-gains tax rates instead of ordinary income tax rates,” says Maryann Reyes, CPA. We asked Reyes for details…
Ordinary vs. Qualified Dividends
How does a dividend become a qualified dividend? The holding period is the key criteria—the investor must hold the share of stock paying the dividend for a minimum of 61 days during the 121-day period that starts 60 days before the share’s “ex-dividend date.” The shares’ ex-dividend date is essentially the date that the dividend is cut off—only shareholders who own the shares at the conclusion of the trading day immediately preceding the ex-dividend date receive the dividend.
When dividend-paying stock is owned through a mutual fund, not only must that fund’s ownership of the stock meet the holding period rule, the mutual fund investor’s ownership of the mutual fund shares must do so as well. A few caveats worth mentioning…
Days on which shares are hedged don’t count toward holding period requirements
Shares are hedged when an investor takes an offsetting position—such as buying puts, selling calls or shorting stocks—to reduce the risk for adverse price movements in their original holding.
Certain preferred stock has longer holding-period requirements
91 days during the 181-day period beginning 90 days before the ex-dividend date.
Qualified dividend rules apply primarily to dividends paid by domestic corporations
But dividends paid by foreign corporations could qualify if the shares trade on a US exchange and/or the corporation is based in a country that has a tax treaty with the US.
Dividends paid by REITs and other non-stock investments don’t qualify
Qualified dividends are taxed at long-term capital-gains tax rates—and those rates are substantially lower than ordinary income tax rates. Long-term capital gains tax rates can reach 20% for high earners, but the vast majority of taxpayers pay either 15% or 0%. As of 2026, that 15% rate applies to married people filing joint returns whose taxable income is between $98,900 and $613,700 (between $49,450 and $545,500 for single taxpayers), with the 0% rate applying to those with taxable income at or below $98,900 ($49,450 if single). That unbeatable 0% rate is why many taxpayers wonder, are qualified dividends taxable at all? Compare that to non-qualified dividends, which are taxed as ordinary income, which range from 10% to 37%. Important: Some high earners also face an additional 3.8% “net investment income tax” (NIIT) on certain investment income including qualified dividends.
Fortunately, US taxpayers rarely have to figure out for themselves whether the dividends they receive meet qualified dividend criteria—their brokerages and mutual fund companies typically determine this for them and supply the information on Form 1099-DIV. But it is still worthwhile to understand qualified dividend rules. Investors would be wise to weigh these rules when buying or selling close to the shares’ ex-dividend days—it might be worth holding shares slightly longer to meet qualified dividend holding period requirements, for example. The owners of closely held C-Corps or other family companies also should be cognizant of qualified dividend rules when deciding how to distribute assets to shareholders.
