Differences Between Qualified and Nonqualified Dividends

Q. What are the differences between qualified and nonqualified dividends?

A. Below is a comparison of qualified vs. nonqualified dividends in terms of the sources.

Qualified Dividends

• Dividends paid by all common and some preferred stock of U.S corporations.  
  
• Dividends from mutual funds or other regulated investment companies that pass through to shareholders can be qualified or nonqualified, depending on the underlying securities the fund holds. If a fund receives a qualified dividend, that dividend will maintain its qualified status when passed through.

Dividends paid by certain foreign corporations may also be qualified. Examples include:

• Shares represented by a publicly traded American Depositary Receipt (ADR)
• Shares that are otherwise readily tradable on an established U.S. securities market
• Corporations incorporated in a U.S. possession
• Corporations incorporated in a country that has an income-tax treaty with the United States that contains an exchange of information program approved by the U.S. Treasury

Nonqualified Dividends

• Distributions from partnerships and REITs typically are not characterized as qualified dividends. 
• Distributions from preferred debt.

In next blog post, we will discuss the different tax treatments of qualified vs. nonqualified dividends.