Ordinary vs. Qualified Dividends Less Tax & More Profit

Ordinary Dividends vs. Qualified Dividends: Pay Less Tax, Pocket More Profit!

Ordinary dividends are taxed at the individual investor’s marginal rate, while qualified dividends are subject to a lower tax rate. Qualified dividends must also meet certain criteria, such as holding period and stock ownership.

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Understanding how taxes apply to dividend payments to maximize returns and minimize tax liabilities is important. Taxes on dividends can be avoided entirely by investing in a tax-advantaged retirement account such as a 401(k) or IRA.

In addition, investors may be eligible for special tax credits or deductions if they meet certain criteria. Lastly, investors should consider the impact of the alternative minimum tax (AMT) when determining their overall tax liabilities.

The Difference Between Ordinary Dividends Versus Qualified Dividends
The Difference Between Ordinary Dividends Versus Qualified Dividends

Ordinary Dividends vs. Qualified Dividends

Ordinary dividends are taxed at an investor’s regular income tax rate, and qualified dividends are taxed at a lower rate.

Ordinary Dividends, which include cash payments or stock distributions from a corporation’s retained earnings, are subject to higher taxes due to their lack of special status in the eyes of the IRS.

Ordinary Dividends, also known as Non-Qualified Dividends, are taxed at the same rate as your regular taxable income. This means that ordinary dividends are taxed up to 37%.

Qualified dividends, on the other hand, are subject to a flat tax rate of 15%-20%, depending on your income bracket. This could mean huge savings for an investor.

Ordinary & Qualified Dividends Defined

Ordinary dividends are usually taxed via standard income tax. Qualified Dividends are typically either regular cash dividends or extra dividends that “Qualify” for lower tax treatment in the USA. As an investor, you are subject to normal taxation on your profits by either Income Tax or the lower Long-Term Capital Gains Tax.

Qualified Dividend Criteria

Qualified dividends must meet certain criteria set by the IRS, including:

• The stock paying the dividend must be held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

• The dividend must be paid on common or preferred stock that trades on a major U.S. stock exchange or certain foreign exchanges.

• The dividend must not be a special class dividend, such as one eligible for capital gains treatment.

When filing taxes, it’s important to understand the differences between qualified and ordinary dividends. Knowing which type of dividend you have received will help you save money in the long run. So make sure to do your research before

The Income Investor

Suppose you want an almost guaranteed return on your investments through dividends. In that case, you are investing for a regular income, as dividends can be paid out yearly, quarterly, or even in some cases, every month.

Your strategy should be to invest in stocks with a history of paying out consistent dividends over time and one with room for future growth. This way, you can receive regular income from the dividend payments and possibly make money when the stock’s price increases.

When investing in dividends, look at the stock’s current yield and the yield rate over time. This will give you a better picture of how much income you can earn from dividends and how it could change. Finally, diversify your dividend investments by investing in different sectors and industries. That way, if one or two stocks don’t perform well during a particular year, other stocks may be doing better.

Investing in different industries will also reduce the risk of losses if one sector experiences a downturn. With these strategies, you can make the most out of dividend investing and start receiving regular income.

Another way to use dividends is for tax-advantaged investing. Many countries have specific policies that allow investors to receive preferential tax treatment on certain types of dividend investments. Depending on the country, this could mean reduced taxes on dividends received or even a tax-exempt status for specific types of investments. By researching your country’s policies, you could save money using these regulations.

What is an Ordinary Dividend?

There are three commonly known types of dividend payments.

1. Regular Cash Dividend

The most common type of dividend payment is a regular cash dividend, which is usually released annually, quarterly, or sometimes monthly.

2. Extra Dividend or Special Dividend

Extra Dividend is a special dividend, usually a large one-off payment to shareholders. For example, a company may have had a particularly great fiscal year and already accumulated significant cash on its books.

Suppose this company has no specific investments with this extra cash, such as new manufacturing or research facilities or possible competitor acquisitions. In that case, it may return some of these profits to shareholders as a sign of goodwill.

3. Liquidating Dividends

A Liquidating Dividend is usually paid if any left-over or allocated funds are available during a company’s liquidation.  Because this form of dividend is considered a return of capital to shareholders, it is typically tax-free.  This is the case even if the dividend exceeds a shareholder’s investment cost. However, because liquidation rarely occurs unless it is necessary to close down a business, investors should be cautious when considering investing in companies with an impending liquidation.

4. Property Dividends

A property dividend is similar to a liquidating dividend but involves distributing property (real estate, precious metals, artwork, etc.) instead of money. This dividend type is also tax-free and can be a great way for investors to diversify their holdings. However, like liquidating dividends, property dividends are rare and should be handled cautiously since other factors may affect the value of the distributed assets.

What is a Qualified Dividend?

Qualified Dividends are typically either Regular Cash Dividends or Extra Dividends that “Qualify” for different Tax treatments in the USA.  As an investor, you are subject to taxation on your profits by either Income Tax or the lower Long-Term Capital Gains Tax.

As an employee, you are taxed on your Income, e.g., Income Tax.

However, the government wants to encourage Long-term investing in US companies, not short-term speculation. Therefore, it allows for a lower rate of taxation for longer-term investors by allowing qualified dividends.

For more information, see What is a Qualified Dividend.

Comparison Ordinary Dividend Qualified Dividend
Tax Applied Income Tax Long-Term Capital Gains Tax
Holding Requirements  

Must hold stock two days before the ex-dividend date


Must hold stock 60 days before the ex-dividend date (for Common Stock) or 90 Days before the ex-dividend date (for preferred stock)

Company Requirements None Company Incorporated in the US/US Territory – Company Stock Traded on a U.S Stock Exchange – Foreign Corporation in a Country eligible under a specific tax treaty.
10% Ordinary Income Tax Rate 10% 0%
15% Ordinary Income Tax Rate 15% 0%
25-35%  Ordinary Income Tax Rate 25% – 30% 15 – 18.8%
39.6%  Ordinary Income Tax Rate 39.6% 20 – 23.8%

Table 1: Ordinary vs. Qualified Dividend Comparison & Dividend Tax Rates.

As you can see, the regulations can significantly affect your dividend income.  If you hold the stock for longer periods and are in the 10% to 15% tax bracket, your dividend income will be tax-free.   And for the other tax brackets, taxation is reduced by 40 to 50%, e.g., from 25% to 15%.

This is as long as your dividend award does not take you into the 25% or above tax bracket; in this case, you would be charged for any dividend in that bracket at the appropriate rate.

Tax Implications of Qualified & Ordinary Dividends

If you have managed your income investing process properly, they will qualify as Qualified Dividends; therefore, when you submit your IRS Form 1099-div with your tax return, you will need to ensure you select box 1b to state they are Qualified Dividends to ensure you get lower taxation. Financial advisors can provide further input on completing your form properly.

Video: Ordinary vs. Qualified Dividend Taxation


If you are investing for income, it is essential to understand if the company you are investing in qualifies for Qualified Dividends and that you are within the correct holding times.

Reducing your taxes as a long-term and income investor will significantly impact your overall investment return, especially when compounded over the years.

Video: Ordinary vs. Qualified Dividends Overview

Investors should consult a qualified tax advisor to understand the relevant income tax rules and regulations and any applicable state or local taxes. Knowing these details can help investors make informed decisions and maximize their investment returns.


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