Why the type of dividend matters for your taxes
TL;DR: Qualified dividends are taxed at the lower capital gains rates (0%, 15%, or 20%). Ordinary dividends are taxed at your regular income tax rate (up to 37%). Most dividends from U.S. stocks held 60+ days are qualified. Check Box 1b on your 1099-DIV.
Dividends are payments companies make to shareholders from their profits. When you own stock in a company that pays dividends, you receive regular payments (usually quarterly) just for holding the shares.
For tax purposes, dividends are split into two categories that are taxed very differently.
This difference can be significant. Someone in the 32% tax bracket would pay $320 on $1,000 of ordinary dividends, but only $150 on qualified dividends—a savings of $170.
A dividend must meet three requirements to receive the lower tax rate:
Most major U.S. stocks pay qualified dividends. Foreign corporations qualify if they're incorporated in a U.S. possession, eligible for tax treaty benefits, or traded on a major U.S. stock exchange (as an ADR).
Certain dividends are always ordinary (non-qualified), no matter how long you hold them:
You must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
In plain English: You generally need to own the stock for at least 60 days around the dividend date. If you buy a stock right before a dividend and sell it right after, those dividends will be taxed as ordinary income.