Ordinary vs. Qualified Dividends: What’s the Tax Difference?

Not all dividends are taxed the same—knowing the difference can save investors money.

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Here’s something nobody tells you when you start investing: those dividend payments hitting your account aren’t all treated the same come tax time. I stumbled across this myself when reviewing my tax forms and wondering why some of my dividend income was taxed differently from others.

It turns out the IRS has created two categories of dividends, and the difference between them can put hundreds of extra dollars in your pocket each year—or take them away if you’re not paying attention. Let’s figure out what’s going on here.

Wait, What Are Dividends Again?

Before we get into the tax weeds, let’s make sure we’re talking about the same thing. When you own stock in a company like Coca-Cola or Microsoft, you’re technically a tiny owner of that business. Some companies like to share their profits with owners by sending out dividend payments—usually a few dollars per share every three months.