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.