Don't let ETF dividends confuse you at tax time

— -- A: There are two main types of dividends. And that difference becomes very important at tax time.

I'm oversimplifying things. But essentially, dividends paid out of earnings by U.S. corporations are considered so-called qualified dividends. These dividends are eligible for, or qualify for, a lower tax rate that matches your long-term capital gains tax. The maximum tax rate on qualified dividends is 15%, as you can read here.

If dividends aren't qualified, then they may be taxed at your ordinary income tax rate. That's generally higher than 15%, sometimes by a considerable amount.

Now that you understand why it's so important to find out if a dividend is qualified or not, I'll answer your question more directly. And the short answer is, yes and no.

The dividends paid by the SPY are mostly qualified, but a portion of them are unqualified. All the dividends paid by the DIA in 2008 are qualified.

Remember that ETFs are simply passing along the dividends they receive from the investments they own. And since the DIA and SPY own shares in mostly U.S. dividend paying companies, their dividends are mostly qualified. But some of the dividends in the SPY are not.

You can look this up yourself using the tax data from the ETF provider. To get details on the dividends for the SPY, go to the SPDR website and click on "ETF Tax Information — 2008," which brings up a pdf file. The dividends for the SPY are shown on page 2 of the pdf. You'll see that in 2008, SPY paid $2.72 a share in dividends, $2.33 a share of which was qualified. The SPY owns some real-estate investment trusts, which pay some unqualified dividends. I'm guessing that's why some of the SPY's dividends are unqualified.

Page 34 of the same website contains the tax information for the DIA. The DIA paid $2.93 a share in 2008, all of which is qualified.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online 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. Click here to see previous Ask Matt columns.