What Is Qualified Dividend Income (QDI)?
Understand how the source of a dividend and your holding period determine its tax treatment, potentially qualifying it for lower long-term capital gains rates.
A dividend is a distribution of a company’s earnings to its shareholders. The Internal Revenue Service (IRS) has different tax rules for these payments, with Qualified Dividend Income (QDI) receiving more favorable tax treatment. This type of income must meet specific criteria set by tax law to qualify for lower tax rates.
Criteria for Qualified Dividend Income
For a dividend to be classified as “qualified,” it must satisfy two primary conditions. The first is that the dividend must be paid by a U.S. corporation or a qualified foreign corporation. A foreign corporation is considered qualified if its stock is readily tradable on an established U.S. securities market or if the corporation is eligible for benefits under a comprehensive income tax treaty with the United States.
The second condition is the holding period requirement. For common stock, the shares must be owned for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the cutoff day that determines who is entitled to receive the declared dividend.
To illustrate the holding period, consider a stock with an ex-dividend date of May 15th. The 121-day window would start 60 days prior, on March 16th, and end 60 days after, on July 14th. To meet the requirement, the shareholder must have held the stock for at least 61 of those 121 days. This rule prevents short-term traders from buying a stock just before the dividend is paid and selling it immediately after, solely to capture the dividend at a lower tax rate.
The holding period rules are slightly different for preferred stock, requiring a holding period of more than 90 days during the 181-day period centered around the ex-dividend date. Failure to meet either the source or holding period requirement means the dividend is treated as ordinary for tax purposes.
Tax Rates for Qualified Dividends
The primary benefit of qualified dividends is that they are taxed at the same preferential rates as long-term capital gains: 0%, 15%, or 20%. The specific rate an individual pays depends on their taxable income and filing status. This offers a significant advantage compared to ordinary dividends, which are taxed at standard income tax rates that can reach up to 37%.
For the 2025 tax year, the income thresholds for these rates vary by filing status. The 0% rate applies to taxable income up to $47,025 for single filers, $63,000 for head of household, and $94,050 for married couples filing jointly. The 15% rate applies to income above the 0% threshold up to $518,900 for single filers, $551,350 for head of household, and $583,750 for married filing jointly. The 20% rate is for any income above these upper thresholds.
This preferential treatment can result in substantial tax savings. For instance, a single taxpayer with $100,000 in taxable income would fall into the 24% marginal tax bracket for ordinary income. If this individual received $1,000 in ordinary dividends, the tax would be $240. If that same $1,000 was classified as qualified dividends, it would be taxed at the 15% rate, resulting in a tax of only $150.
High-income taxpayers may be subject to an additional 3.8% Net Investment Income Tax (NIIT) on their investment income, including qualified dividends. This tax applies to individuals with modified adjusted gross income over certain thresholds, such as $200,000 for single filers and $250,000 for married couples filing jointly.
Dividends Ineligible for Qualified Treatment
Certain types of payments, even if referred to as dividends, are explicitly excluded from being treated as qualified dividend income. These distributions do not meet the specific requirements set by the IRS and are therefore taxed as ordinary income.
Payments from certain entities are automatically disqualified. This includes dividends from Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs). Distributions from credit unions, savings and loans, or other cooperative banks are also not qualified; these are technically considered interest income. Dividends paid by tax-exempt corporations or certain farmers’ cooperatives fall into this non-qualified category as well.
Other specific transactions also result in non-qualified treatment. Capital gain distributions, which are sometimes paid out by mutual funds or exchange-traded funds (ETFs), are not qualified dividends. Similarly, payments received in lieu of dividends, which can occur in short sale transactions, do not qualify for the lower tax rates.
Locating and Reporting QDI
Taxpayers receive information about their dividend income on Form 1099-DIV, “Dividends and Distributions.” This form is sent by the financial institution or brokerage that holds the investments. It details the different types of distributions received throughout the tax year, separating them into specific categories for reporting purposes.
To find the amount of qualified dividends received, a taxpayer should look at Box 1b of the Form 1099-DIV. Box 1a on the same form shows the total amount of ordinary dividends, which includes the qualified dividends from Box 1b.
When filing a federal income tax return, the amount from Box 1b of Form 1099-DIV is reported on Form 1040, “U.S. Individual Income Tax Return.” The specific line for qualified dividends is Line 3a. The total ordinary dividends from Box 1a are reported on Line 3b of the same form.