Certain 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 period of 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 (the rates are 0%, 15%, and 20%). Higher earners are also impacted by the 3.8% net investment income tax (NIIT) outlined in the Affordable Care Act. So many actually pay an effective rate of 18.8% (15%+3.8% for the NIIT) or 23.8% (20%+3.8%) on long-term capital gains and dividends.
In certain circ*mstances, such as when shares are lent to a third party, payments may be made in lieu of dividends. If this applies to you, learn more about Annual Credit for Substitute Payments.
Qualified dividends on your tax reporting statement
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, which can be as high as 37%.
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.
Holding periods
Although the holding period requirement is the same whether you received a dividend for shares you hold directly or in a mutual fund during the tax year, how you determine the holding period may vary, as outlined below.
Note: When counting the number of days the fund was held, include the day the fund was disposed of, but not the day it was acquired.
Mutual funds
All of the following requirements must be met:
- 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. (The ex-dividend date is the date after the dividend has been paid and processed and any new buyers would be eligible for future dividends.)
- 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.
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.
Example of determining holding period
Consider this hypothetical situation in which you have dividends reported on Form 1099-DIV as qualified from shares in XYZ fund. You purchased 10,000 shares of XYZ fund on April 27 of the tax year. You sold 2,000 of those shares on June 15, but continue to hold (unhedged at all times) the remaining 8,000 shares. The ex-dividend date for XYZ fund was May 2.
Therefore, during the 121-day window, you held 2,000 shares for 49 days (from April 28 through June 15) and 8,000 shares for at least 61 days (from April 28 through July 1).
The dividend income from the 2,000 shares held 49 days would not be qualified dividend income. The dividend income from the 8,000 shares held at least 61 days should be qualified dividend income.
Calculating the amount of qualified dividends
Once you determine the number of shares that meet the holding period requirement, find the portion per share of any qualified dividends. For each qualified dividend, multiply the two amounts to determine the amount of the actual qualified dividend.
To continue with the example above, a dividend of $0.18 per share was paid but only 50% of that dividend ($0.09 per share) was reported as a qualified dividend. Since you only held 8,000 out of your total 10,000 shares for the required holding period, the calculation to determine the amount of eligible qualified dividends would be:
Of the $1,800 reported as ordinary dividends for XYZ fund in line or column 1a of Form 1099-DIV, only $900 would be reported in line or column 1b as a Qualified Dividend. Of that $900, only $720 should be taxable at one of the more favorable rates. The remaining $1,080 of dividends reported would be taxed at your ordinary income tax rate.
FAQs
Understanding Qualified Dividends
A dividend is considered qualified if the shareholder has held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date. 2 The ex-dividend date is one market day before the dividend's record date.
What are qualified dividends for Fidelity ETFs? ›
Qualified dividends: These are dividends designated by the ETF as qualified, which means they qualify to be taxed at the capital gains rate, which depends on the investor's modified adjusted gross income (MAGI) and taxable income rate (0%, 15% or 20%).
Do you have to pay taxes on qualified dividends? ›
Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. The payer of the dividend is required to correctly identify each type and amount of dividend for you when reporting them on your Form 1099-DIV for tax purposes.
How does Fidelity handle dividends? ›
A dividend is a payment made by a company to share its profits with its shareholders. If your company stock pays a dividend, it goes into your Fidelity Account® as cash by default. But you could use that money to purchase more shares of company stock or other investments to help keep it invested and working for you.
Why are my dividends both ordinary and qualified? ›
Qualified dividends are a subset of your ordinary dividends. Qualified dividends are taxed at the same tax rate that applies to net long-term capital gains, while non-qualified dividends are taxed at ordinary income rates. It is possible that all of your ordinary dividends are also qualified dividends.
How do I know if my dividends are eligible or non eligible? ›
Eligible dividends are issued from a corporation up to the amount sitting in the GRIP pool. Eligible dividends are "grossed-up" to reflect corporate income earned, and then a dividend tax credit is included to reflect the higher rate of corporate taxes paid.
Why are my ETF dividends not qualified? ›
To receive a qualified dividend, you must hold an ETF for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date and ends 60 days after that date. This is the last day when new owners can qualify for the next dividend.
What is the difference between qualified and nonqualified dividends? ›
Ordinary vs. qualified dividends: What's the difference? Put simply, a qualified dividend qualifies that payment for a lower dividend tax rate. Meanwhile, nonqualified or ordinary dividends get taxed at an investor's ordinary income tax rate.
Are mutual fund dividends considered qualified? ›
Dividends paid by mutual funds can be classified as ordinary or qualified dividends, which are taxed at different rates. Ordinary dividends are taxed at the investor's regular income tax rate. Meanwhile, qualified dividends have lower capital gains tax rates of 0%, 15%, or 20%, depending on your overall income.
Can you live off qualified dividends? ›
Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.
Most "normal" company stocks you've held for at least two months will have their dividends qualified. Many unorthodox stocks – such as REITs and MLPs – and stocks held for less than two months generally will not.
Am I taxed on dividends that are reinvested? ›
Dividends from stocks or funds are taxable income, whether you receive them or reinvest them. Qualified dividends are taxed at lower capital gains rates; unqualified dividends as ordinary income. Putting dividend-paying stocks in tax-advantaged accounts can help you avoid or delay the taxes due.
Does Fidelity keep track of dividends? ›
To begin, once you are logged into your Fidelity account, navigate to the 'Accounts & Trade' section, where you will find the 'Activity & Orders' tab. Click on this tab to view a comprehensive breakdown of all your recent transactions, including dividend payments.
Can Fidelity automatically reinvest dividends? ›
Log into your Fidelity account using your login credentials. Once you're in, navigate to the 'Accounts & Trade' menu and locate the 'Dividends and Capital Gains' section. From there, select the account for which you want to set up automatic reinvestment.
Is Fidelity High Dividend ETF a good investment? ›
The fund has a beta of 1.02 and standard deviation of 15.63% for the trailing three-year period. With about 110 holdings, it effectively diversifies company-specific risk. Fidelity High Dividend ETF is a reasonable option for investors seeking to outperform the Style Box - All Cap Value segment of the market.
How do I know if I am eligible for dividends? ›
You will be eligible to receive the dividend for stocks you bought before the ex-date. Note that you won't get dividend if you buy the stock on the ex-date, but you will be eligible if you sell them on the ex-date. Dividend will be credited to your primary bank account if you sell the stocks on the ex-date.
Why are all my dividends non qualified? ›
A nonqualified dividend is one that doesn't meet IRS requirements to qualify for a lower tax rate. These dividends are also known as ordinary dividends because they get taxed as ordinary income by the IRS. Nonqualified dividends include: Dividends paid by certain foreign companies may or may not be qualified.
Which types of dividends are not taxable? ›
You would not owe tax on dividends from stocks held in a retirement account, such as a Roth IRA or 401(k), or a college savings plan, such as a 529 plan or Coverdell ESA.
How much dividend income is tax free? ›
Your “qualified” dividends may be taxed at 0% if your taxable income falls below $44,625 (if single or Married Filing Separately), $59,750 (if Head of Household), or $89,250 (if (Married Filing Jointly or qualifying widow/widower) (tax year 2023). Above those thresholds, the qualified dividend tax rate is 15%.
