When it comes to dividends, there are two main types: qualified and non-qualified. But what exactly does that mean? What is the difference between qualified vs nonqualified dividends?

In this article, we will take a closer look at each type and explain what makes them different. We'll also provide examples so you can see how each one works in practice. By the end of this article, you'll be an expert on qualified vs nonqualified dividends.

What is a qualified dividend?

A qualified dividend is a type of dividend that meets certain criteria set forth by the IRS. It's essentially just a dividend payout that is taxed at a lower rate than other types of income

It's a classification that U.S tax agencies use to provide preferential tax treatment to certain dividend payments. 0-23.8% is the typical tax rate for qualified dividends.

What qualifies as a qualified dividend?

To be considered a qualified dividend, the dividend must be paid by a US corporation or a foreign company that is eligible for preferential tax treatment under US law. 

Furthermore, the shareholder must have held the stock for a certain period to ensure that it is more of a long-term investment rather than a quick trade.

Qualified dividend example

If you own 100 shares of XYZ Corporation and XYZ pays a $0.50 dividend per share, you would receive $50 in dividends. If XYZ is a US corporation and you've held the shares for more than the set amount of time to be eligible, then your $50 dividend would be considered a qualified dividend. 

This might be considered tax-free depending on your tax bracket for the year. Each jurisdiction has different rules, so it's important to check with your local tax agency. 

What is a non-qualified dividend?

As a non-qualified dividend, these payouts are not eligible for the lower tax rate that applies to most qualified dividends. Instead, nonqualified dividends are taxed at your marginal tax rate. Marginal tax rate means the rate you pay on your last dollar of income. 

For example, the first $20,000 of income may be taxed at 15%, the next $30,000 at 25%, and anything over $50,000 may be taxed at 28%. These percentages are just examples, it's best to speak with a CPA to understand where you fall. But, non-qualified taxes can put you at a higher marginal tax rate. This would mean you might have to pay a higher overall percentage tax on your nonqualified dividends than you would on qualified dividends. 

What qualifies as a non-qualified dividend?

There are a few different types of dividends that can be classified as nonqualified. One type is when the dividend is paid out by a corporation that is not located in the U.S. Because they are a foreign entity, investors do not receive the same tax benefits. 

Another type of nonqualified dividend is when the dividend is paid out by a company that is not publicly traded. These companies are typically smaller and may not have the same financial stability as a publicly traded company. 

A dividend that is not qualified by the IRS would be considered non-qualified and tax appropriately so. Make sure to keep reading as we identify how to spot a qualified dividend. 

Nonqualified dividend example

If you are in the 25% tax bracket, any nonqualified dividends you receive will be taxed at 25%. So, let's say you received $1000 in dividends this year, $700 of which are qualified and $300 of which are nonqualified. You would owe taxes on the $300 at your marginal rate. 

What is the difference between qualified and nonqualified dividends?

Qualified vs Nonqualified Dividends

Qualified dividends offer a lower long-term capital gains tax rate while nonqualified dividends are taxed at your ordinary income tax rate. The main difference between qualified and non-qualified dividends is the tax treatment each one receives. 

Simply put, qualified dividends are qualified to be taxed at a lower rate (hence the name) than non-qualified dividends. This means non-qualified dividends can potentially be more expensive in terms of tax payments. 

However, your tax bracket matters here as well – so it’s important to speak with your accountant or tax specialist to learn more about how each type of dividend would affect you. Other than the tax implications, there are no real differences between the two types of dividends. 

They’re both just dividend payments from stocks that you own.

How do I know if my dividends are qualified or ordinary?

To find out if your dividends are qualified or taxed as ordinary income, you can contact your broker for IRS Form 1099-DIV. On this form, there are two boxes: 

  • Box 1a = Ordinary Dividends 
  • Box 1b = Qualified Dividends

This is the most simple and effective way of knowing which of your dividends are

qualified. The IRS also offers some guidance on what types of dividends may be

considered qualified. 

You can have a general idea based on your knowledge of

the company but you want to make sure that you know for sure by checking the


Asking for additional aid from a CPA is nothing to be ashamed of. Taxes can be complicated for some people and making mistakes while trying to do your own taxes can be costly. 

By going over your situation with your accountant and reminding them to ensure that the dividends are classified properly, you can help to avoid any mistakes.

Why are qualified dividends not taxed?

The main reason why qualified dividends are not taxed is that they are considered to be long-term capital gains. This is because the investor has held onto the stock for more than a year before selling it. 

Long-term capital gains are taxed at a lower rate than short-term capital gains, which is why qualified dividends receive this treatment. They are also taxed but taxed at a lower rate than nonqualified dividends. 

This can also be seen as an incentive to invest in stocks that contribute to the U.S economy being located in the United States is one of the requirements of being a qualified dividend. To learn more about taxes related to dividends, please consult a tax professional.