Are SCHD Dividends Qualified for Tax Purposes?
Understand the tax implications of SCHD's dividend payments. Learn how an ETF's internal operations determine the tax character of its annual distributions.
Investors in the Schwab U.S. Dividend Equity ETF (SCHD) often ask whether their dividend payments receive favorable tax treatment. While a substantial portion of the dividends from SCHD are considered qualified, it is uncommon for 100% of the distributions to meet this standard. The exact percentage can fluctuate annually based on the fund’s underlying investment activities.
Understanding Qualified vs. Non-Qualified Dividends
Dividends paid to shareholders are categorized as either non-qualified or qualified, with each having different tax consequences. A non-qualified dividend, often called an ordinary dividend, is taxed at an individual’s regular income tax rates. These are the same marginal tax brackets that apply to wages and salaries, ranging from 10% to 37% depending on one’s taxable income and filing status.
A qualified dividend meets specific Internal Revenue Service (IRS) requirements that allow it to be taxed at lower long-term capital gains rates. For a dividend to be qualified, the investor must have held the underlying stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The dividend must also be paid by a U.S. corporation or a qualifying foreign corporation.
For the 2024 tax year, the rate for qualified dividends is 0% for individuals with taxable income up to $47,025 ($94,050 for married couples filing jointly). The rate increases to 15% for those with income between $47,026 and $518,900 ($94,051 to $583,750 for joint filers). The highest earners, with income above those thresholds, pay a 20% rate on their qualified dividends.
The Composition of SCHD’s Distributions
A high percentage of the dividends distributed by SCHD have historically been qualified, but it is rarely the full amount. This is because the tax character of the income an ETF generates is passed directly through to its shareholders. For a dividend from a company held within SCHD’s portfolio to be passed along as qualified, the ETF must satisfy the same holding period requirements that an individual investor would.
SCHD tracks an index that is reconstituted annually and rebalanced quarterly. During these periods, the fund buys and sells stocks to align its holdings with the index methodology. If SCHD receives a dividend from a stock it has held for less than the required 61-day period, that dividend is considered non-qualified and is passed through to shareholders as an ordinary dividend.
ETFs like SCHD can also generate income from sources other than dividends. The fund may engage in securities lending, where it lends out its shares to other institutions for a fee. This lending income is distributed to shareholders as ordinary income, not qualified dividends. Any income derived from derivatives, such as futures contracts the fund might use, also fails to qualify for the lower tax rates.
Locating SCHD’s Dividend Information for Tax Reporting
The definitive source for your dividend income information is the Consolidated Form 1099 provided by your brokerage firm. This includes Form 1099-DIV, “Dividends and Distributions,” which details the breakdown of the payments you received from your investments, including SCHD, throughout the year. This form is sent to investors in late January or February of the following year.
When you receive your Form 1099-DIV, two boxes explain the tax treatment of your SCHD dividends. Box 1a, labeled “Total ordinary dividends,” reports the full amount of ordinary dividends you received. Box 1b, labeled “Qualified dividends,” shows the portion of the amount in Box 1a that is eligible for the lower long-term capital gains tax rates. The amount in Box 1b is a subset of Box 1a, not an additional payment.
Investors looking for this information for planning purposes before tax forms are issued can find it on the ETF provider’s website. Charles Schwab Asset Management publishes supplemental tax information for its ETFs, including the historical percentage of distributions that were classified as qualified dividends or other income types. This data can help shareholders estimate their potential tax liability.