Why are some dividends qualified and others aren't?
— -- Q: Why are some of the dividends paid by my ETFs "qualified," while others are not?
A: Knowing the difference between qualified and unqualified dividends is a big deal for investors at tax time.
When a dividend is considered to be qualified, that doesn't mean it's headed to the next Olympic games. Qualified dividends are those that may be subject to the IRS' lower tax rate on dividends. If a dividend is qualified, you may even qualify for the IRS' 0% tax rate.
What is a qualified dividend? There are many rules around this, and you can get the full details from the IRS.
But as a general rule, just know that dividends are qualified when they're paid by a U.S. corporation or a foreign firm in a country with tax agreements in place with the U.S. So if you get a dividend from Microsoft (MSFT), that's a qualified dividend if you hold the stock for more than 60 days during the 121-day period starting 60 days before the ex-dividend date.
The same goes for exchange traded funds, or ETFs. If you own an ETF that owns stocks of U.S. companies, those dividends paid are most likely qualified.
There are some very common investments that are widely held, though, that do not pay qualified dividends in many cases. Those include dividend payments by bond ETFs, as well as dividends from many emerging-markets ETFs and real estate investment trust ETFs.
Knowing which dividends are qualified and which ones aren't is critical. Qualified dividends are generally taxed at the lower capital gains rates, while non-qualified dividends are taxed generally at your ordinary income tax rate.
Luckily, you don't have to worry about figuring out if dividends are qualified. It's your brokerage firm's responsibility to tell you if dividends are qualified and provide the information in your year-end tax statement.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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