Qualified Dividend
Qualified Dividend
Dividends from U.S. corporations and qualified foreign corporations that meet IRS holding period requirements (more than 60 days during the 121-day period surrounding the ex-dividend date). Taxed at preferential long-term capital gains rates of 0%, 15%, or 20% based on income. Non-qualified (ordinary) dividends are taxed at higher ordinary income rates up to 37%.
An investor in the 32% tax bracket receives $1,000 in dividends from a blue-chip U.S. stock held for the entire year. If the dividends are qualified, the tax owed is $150 (15% rate), keeping $850. If the same dividends were non-qualified (like from a bond fund), the tax would be $320 (32% ordinary rate), keeping only $680. The qualified dividend status saves $170 in taxes on just $1,000 of income.
Students often believe all stock dividends are automatically qualified, but the 60-day holding period requirement during the 121-day window (60 days before through 60 days after the ex-dividend date) must be met. Additionally, dividends from bond funds and money market funds are NOT qualified even though they are called "dividends" because they represent interest income passed through. REITs also pay mostly non-qualified dividends because they distribute rental income, not corporate earnings.
How This Is Tested
- Identifying which dividend sources qualify for preferential tax treatment (U.S. corporations yes, bond funds no)
- Calculating tax savings from qualified dividend treatment versus ordinary income rates
- Understanding the 60-day holding period requirement within the 121-day window around ex-dividend date
- Recognizing that bond fund and money market fund "dividends" are taxed as ordinary income
- Comparing after-tax returns between qualified dividends and tax-exempt municipal bond interest
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Qualified dividend tax rates | 0%, 15%, or 20% | Same as long-term capital gains rates; depends on income bracket |
| Holding period requirement | More than 60 days during 121-day period | 60 days before ex-dividend date + ex-dividend date + 60 days after |
| Non-qualified (ordinary) dividend tax rate | Ordinary income rates (up to 37%) | Bond funds, money market funds, most REIT dividends |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Elena, a retired investor in the 24% tax bracket, is comparing two investment options for her taxable brokerage account. Option A is a diversified U.S. stock fund with a 2.5% dividend yield (qualified dividends). Option B is a high-yield corporate bond fund with a 4.0% yield (interest paid as dividends). Both have similar risk profiles and $100,000 initial investments. Which investment provides higher after-tax income, and why?
B is correct. Option A (stock fund): $100,000 × 2.5% = $2,500 gross. Qualified dividend tax: $2,500 × 15% = $375. After-tax: $2,500 - $375 = $2,125.
Option B (bond fund): $100,000 × 4.0% = $4,000 gross. Bond fund "dividends" are NOT qualified (they are interest income passed through). Ordinary income tax: $4,000 × 24% = $960. After-tax: $4,000 - $960 = $3,040.
Despite the higher tax rate, Option B still provides more after-tax income ($3,040 vs $2,125) due to the significantly higher yield. The 1.5% yield advantage overcomes the tax disadvantage.
A incorrectly states the calculation but arrives at the wrong conclusion. C is incorrect because qualified dividends are not tax-free; they are taxed at preferential rates (0%, 15%, or 20%). D is incorrect because bond fund dividends are taxed as ordinary income, not at qualified dividend rates.
The Series 65 exam tests your ability to calculate after-tax returns and recognize that bond fund "dividends" are NOT qualified dividends. Understanding this distinction is critical for making appropriate suitability recommendations to clients in taxable accounts, where tax treatment significantly impacts net returns.
What is the holding period requirement for a dividend to qualify for preferential qualified dividend tax treatment?
B is correct. To qualify for preferential tax treatment, a dividend must meet the holding period requirement: the investor must hold the stock for MORE than 60 days during the 121-day period that begins 60 days before the ex-dividend date and ends 60 days after the ex-dividend date. This ensures investors are not simply buying stock right before the dividend and selling immediately after to capture the preferential rate.
A (30 days/61-day period) confuses the wash sale rule window with the qualified dividend holding period. C (90 days/calendar year) is not the correct standard; the 121-day window is specifically tied to the ex-dividend date, not the calendar year. D (12 months) confuses the qualified dividend holding period with the long-term capital gains holding period; these are different requirements.
The Series 65 exam frequently tests the specific holding period requirement for qualified dividends because it is commonly confused with other time-based rules (wash sale, long-term capital gains). Understanding the precise 60-day/121-day window prevents errors when advising clients on dividend capture strategies and tax planning.
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Access Free BetaAn investor in the 32% ordinary income tax bracket and 15% long-term capital gains bracket receives $5,000 in dividends during the year: $3,000 from a U.S. stock mutual fund (qualified) and $2,000 from a corporate bond fund (non-qualified). What is the total tax owed on these dividends?
B is correct. Calculate tax on each dividend type separately:
Qualified dividends (stock mutual fund): $3,000 × 15% = $450
Non-qualified dividends (bond fund): $2,000 × 32% = $640
Total tax owed: $450 + $640 = $1,090
The key distinction is that stock mutual fund dividends are qualified and taxed at the preferential 15% rate, while bond fund "dividends" are really interest income passed through and taxed at ordinary income rates (32%).
A ($750) incorrectly applies the 15% qualified rate to all dividends: $5,000 × 15% = $750. This ignores that bond fund dividends are not qualified. C ($1,600) incorrectly applies the 32% ordinary rate to all dividends: $5,000 × 32% = $1,600. This treats qualified dividends as ordinary income. D ($1,850) results from calculation errors.
Tax calculation questions on the Series 65 exam test your ability to distinguish qualified from non-qualified dividends and apply the correct tax rates. Recognizing that bond fund dividends are taxed as ordinary income (not qualified dividend rates) is essential for accurate tax planning and after-tax return comparisons.
All of the following dividend sources typically provide qualified dividend treatment EXCEPT
C is correct (the EXCEPT answer). Money market fund "dividends" are NOT qualified dividends. Money market funds invest primarily in short-term debt instruments (Treasury bills, commercial paper, CDs) that generate interest income, not dividends. When this interest is distributed to shareholders, it is called a "dividend" but is taxed at ordinary income rates, not qualified dividend rates. This is a common trap on the exam.
A is accurate: U.S. corporation dividends meeting the 60-day holding period requirement are qualified and receive preferential tax treatment (0%, 15%, or 20%). B is accurate: stock mutual funds pass through qualified dividends from their underlying U.S. stock holdings to shareholders. D is accurate: qualified foreign corporations can pay qualified dividends if the holding period requirement is met and other IRS criteria are satisfied.
The Series 65 exam tests your ability to distinguish true qualified dividends from distributions labeled "dividends" that are really interest income. Money market funds and bond funds are frequently tested as non-qualified sources because advisers and clients commonly assume all "dividends" receive preferential tax treatment.
A client purchased shares of a U.S. technology company on August 1 and received a $500 dividend on September 15 (ex-dividend date: September 1). The client is considering selling the shares and asks about the tax treatment of the dividend. Which of the following statements are accurate?
1. If the client sells on September 30, the dividend will NOT qualify for preferential tax treatment
2. The client must hold the shares until at least November 1 for the dividend to be qualified
3. The dividend will be taxed at ordinary income rates if the holding period requirement is not met
4. The 121-day window for the holding period began on July 3 (60 days before ex-dividend date)
C is correct. Statements 1, 3, and 4 are accurate.
Statement 1 is TRUE: Selling on September 30 means the client held the stock from August 1 to September 30 (60 days). The requirement is MORE than 60 days during the 121-day window, so exactly 60 days is insufficient. The dividend will NOT be qualified.
Statement 2 is FALSE: The client does not need to hold until November 1. The requirement is more than 60 days during the 121-day period around the ex-dividend date (September 1), not a specific end date. Holding from August 1 through November 1 (92 days total, with more than 60 days falling within the 121-day window) would satisfy the requirement, but this is not the only acceptable holding period.
Statement 3 is TRUE: If the holding period requirement is not met, the dividend is classified as non-qualified and taxed at ordinary income rates (up to 37%), not the preferential qualified dividend rates (0%, 15%, or 20%).
Statement 4 is TRUE: The 121-day period begins 60 days before the ex-dividend date (September 1). Counting back 60 days from September 1 lands on July 3. The period runs from July 3 through October 31 (60 days before + ex-dividend date + 60 days after = 121 days total).
The Series 65 exam tests detailed understanding of the qualified dividend holding period requirement, including the 121-day window calculation and the "more than 60 days" threshold. Recognizing that exactly 60 days is insufficient and understanding how to count the 121-day period demonstrates mastery of tax-efficient dividend planning for clients.
💡 Memory Aid
Remember "60 Days, 121-Day Window" for qualified dividends: You need MORE than 60 days of ownership during the 121-day period (60 days before the ex-dividend date + 60 days after). Think of it as a "dividend commitment test": the IRS wants you committed to owning the stock, not just grabbing the dividend and running. Also, bond fund "dividends" = interest = ordinary rates (they are NOT qualified despite the name).
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Where This Appears on the Exam
This term is tested in the following Series 65 exam topics: