Dividend tax rate

The dividend tax rate is the rate an investor pays on dividend income, and it hinges on one classification: whether the dividend is qualified or nonqualified. Qualified dividends are taxed at the favorable long-term capital gains rates of 0%, 15%, or 20%, depending on the investor's taxable income. Nonqualified dividends — also called ordinary dividends — are taxed at the investor's ordinary income rate, the same rate applied to wages.

To be qualified, a dividend generally must be paid by a U.S. corporation (or a qualifying foreign corporation), and the investor must satisfy a holding period: the stock must be held for more than 60 days during the 121-day window that begins 60 days before the ex-dividend date. Dividends that fail either test are taxed as ordinary income.

Some dividend-like payments are never qualified regardless of holding period. Distributions from REITs, most money market funds, and bond fund interest distributions are typically taxed as ordinary income. Mutual funds pass the character of their income through to shareholders, so a stock fund can distribute qualified dividends while a bond fund's distributions are ordinary. Dividends received in tax-advantaged accounts like IRAs are not taxed in the year received at all.

Dividend taxation appears throughout the securities licensing exams. The SIE exam tests the basic qualified versus nonqualified distinction, while the Series 65 and Series 6 exams go further into tax-aware recommendations — for example, why a high-earning client might prefer qualified-dividend-paying stocks in a taxable account and hold REITs or bond funds in a retirement account.