Are qualified dividends included in ordinary dividends?
Qualified dividends are included with ordinary dividends in box 1a of the Internal Revenue Service Form 10&9-DIV; the box includes all ordinary dividends earned from a particular stock. Box 1b shows the number of the dividends in box 1a that are qualified dividends. The two types of dividends are treated differently for tax purposes.
Qualified dividends must be issued by U.S.-based corporations or foreign corporations that trade on major U.S. stock exchanges such as the NASDAQ and NYSE. Additionally, stocks must be held for at least 60 days within a 120-day period that begins 60 days before the ex-dividend date. Dividends that meet these criteria are taxed at the long-term capital gains rate, which ranges between 15% and 20%. Investors at the 15% income tax rate or below pay no taxes on qualified dividends. Investors at income tax rates of 25% or higher save the most money when it comes to paying taxes on qualified dividends.
Ordinary dividends are those that do not meet the above criteria. Investors pay tax on these dividends at their ordinary income tax rate. As of 2016, tax rates range from 10% to 39.6%. Investors with adjusted gross income of $200,000 — $250,000 for joint filers — also pay an additional 3.8% tax net investment income tax (NIIT) on dividend income.
People who include dividend-paying stocks in their retirement investment accounts, such as 401(k)s, do not pay taxes on dividends until they begin taking distributions on the funds. People with Roth IRAs enjoy the greatest tax benefit because distributions are typically tax-free, assuming the account holder follows the rules for Roth IRA distributions.