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Sunday, September 12, 2021

Qualified and Ordinary Dividends

 

Dividends known as qualified dividends are subject to the same tax rates as long-term capital gains, which are lower than rates for ordinary income.  Qualified dividends are generally dividends from shares in domestic corporations and certain qualified foreign corporations which you have held for at least a specified minimum time, known as a holding period. Another requirement is that the shares be unhedged; that is, there were no puts, calls, or short sales associated with the shares during the holding period.  These dividends are taxable federally at the capital gains rate, which depends on the investor’s modified adjusted gross income (AGI) and taxable income.

Qualified dividends are reported on Form 1099-DIV in line 1b or column 1b. However, not all dividends reported on those lines may have met the holding period requirement. Those non-qualified dividends, as well as other ordinary dividends, may be taxed at your ordinary income tax rate.  If you neither bought nor sold securities in the tax year, the potential qualified dividends reported on your Form 1099-DIV should meet the holding period requirement and qualify for the lower tax rate, unless you hedged the securities.

 Stock

  • You must have held those shares of stock unhedged for at least 61 days out of the 121-day period that began 60 days before the ex-dividend date.
  • For certain preferred stock, the security must be held for 91 days out of the 181-day period beginning 90 days before the ex-dividend date.
Mutual Fund
  • The fund must have held the security unhedged for at least 61 days out of the 121-day period that began 60 days before the security’s ex-dividend date.
  • For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
  • You must have held the applicable share of the fund for at least 61 days out of the 121-day period that began 60 days before the fund’s ex-dividend date.

IRS reference  Tax Topic 404