What Is a Non-Qualified Dividend?
In plain English
A non-qualified dividend, also called an ordinary dividend, is any dividend that does not meet the IRS requirements for qualified status. Non-qualified dividends are taxed at your ordinary income tax rate, which can be significantly higher than the preferential rate applied to qualified dividends.
What Types of Dividends Are Non-Qualified?
Common sources of non-qualified dividends include: REIT distributions, money market fund dividends, dividends from employee stock options, dividends on shares held less than the required holding period, and dividends from tax-exempt organizations. Special dividends and return-of-capital distributions may also be treated as non-qualified.
How Are Non-Qualified Dividends Taxed?
Non-qualified dividends are taxed as ordinary income at your marginal tax bracket rate, which ranges from 10% to 37% for federal taxes. This can result in a significantly higher tax burden compared to qualified dividends, which max out at 20% (plus the 3.8% NIIT for high earners).
How Can You Minimize the Impact of Non-Qualified Dividends?
Consider holding investments that generate non-qualified dividends — such as REITs and bond funds — in tax-advantaged accounts like IRAs or 401(k)s where dividends grow tax-deferred. Keep investments that produce qualified dividends in taxable accounts. This strategy is known as asset location optimization.
Frequently asked questions
How do I know if my dividends are qualified or non-qualified?
Your brokerage reports this on Form 1099-DIV. Box 1a shows total ordinary dividends, and Box 1b shows the qualified portion. The difference between Box 1a and Box 1b is your non-qualified dividend amount.
Can a dividend switch from non-qualified to qualified?
If you initially fail the holding period test but continue holding the shares, the dividend remains non-qualified for that payment. Future dividends from the same stock may qualify if you meet the holding period at the time of those later payments.
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Related terms
Qualified Dividend
A qualified dividend is taxed at the lower long-term capital gains rate rather than ordinary income rates, provided holding period and other requirements are met.
Tax Bracket
Tax brackets are the income ranges at which different marginal rates apply under the U.S. progressive tax system. Only income within each bracket is taxed at that bracket's rate.
Tax-Deferred
Tax-deferred means taxes on investment earnings or contributions are postponed until a future date — usually retirement — allowing compounding to work on pre-tax dollars in the meantime.
Tax-Advantaged Account
A tax-advantaged account offers special tax benefits — either tax-deferred growth or tax-free withdrawals — to encourage saving for retirement, healthcare, or education.
Adjusted Gross Income (AGI)
Adjusted gross income is your total income minus specific above-the-line deductions. It is the key figure on your tax return that determines eligibility for many credits, deductions, and financial programs.