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Concept · Tax in investing

What makes a dividend qualified?

Direct answer A dividend from a US or qualifying foreign company is qualified, and taxed at the long-term capital gains rate, if the stock was held for at least 61 days in the 121-day window around the ex-dividend date without a hedge. Otherwise it is ordinary income. Most index-fund dividends qualify; option-income fund payouts often do not.

For a top-bracket Californian a qualified dividend costs 35.1% and an ordinary one 52.1%, the same gap as the one-year line on gains. The dividend is the part of an index ETF’s return that no wrapper can defer, so its rate is the one that matters. Read the dividend tax no wrapper removes.

Sources

  1. IRC §1(h)(11), qualified dividend income and the holding requirementlaw.cornell.edu
  2. IRS Publication 550irs.gov

Used in

The dividend tax no wrapper removes An index ETF defers its capital gains almost completely. It cannot defer its dividends. At a 1.3% yield and a 35% rate, that is 46 basis points a year, and it is most of the ETF's remaining tax drag. The one-year line is worth 17 cents per dollar Everyone knows the line. In 2015 individuals still realized $3.3 billion of stock gains within three months of it, at the short-term rate. Where a known rule gets crossed early, and what it costs. What a dollar of gain keeps after tax Sell a winner at the top California bracket and 35 cents of every dollar of gain goes to tax. Sell it inside a year and 52 cents go. Where those two numbers come from.

Related concepts

Holding periodReturn of capitalTax drag

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