Nonqualified Dividend

A nonqualified dividend is a type of dividend payment made by a Corporation to its shareholders that does not meet the criteria to be taxed at the lower long-term Capital Gains Tax rate. Instead, nonqualified dividends are taxed as Ordinary Income at the Shareholder’s regular income tax rate.

Nonqualified dividends typically include:

• Dividends paid by certain foreign corporations.
• Dividends from real estate investment trusts (REITs).
• Dividends from master limited partnerships (MLPs).
• Dividends paid on Stock that has not been held for the required period (generally less than 61 days within a specified timeframe).

For example, if an investor receives a dividend of $1,000 from a REIT, that amount is considered a nonqualified dividend and will be taxed at the investor’s ordinary income tax rate, which could be higher than the Capital gains rate.

In a case where an investor purchases shares of a foreign company and receives a dividend, if the foreign corporation does not meet IRS qualifications, that dividend will also be classified as nonqualified and subject to ordinary income tax.