The main topics of this lesson are: Ordinary and Qualified Dividends; Money Market Dividends; and Mutual Fund Dividends. For this lesson, refer to the Study Notes and watch the video for a synopsis.
• Distributions from stock shares are dividends.
• Distributions from money market funds and some distributions from mutual funds are also
• All payments classified as dividends are ordinary dividends for tax purposes and taxed as
• Dividends paid by US corporations or foreign corporations located in a country with which the
US has a tax treaty or that are listed on a major exchange may be qualified for a lower US
income tax rate.
• There are two criteria to be met for a payment to qualify for a lower tax rate:
o The payment must be from one of the entities described above; and
o You must hold the security for 60-days before or after the payment (own for 60-days in
a 121-day window). Note that the day of purchase is not counted.
• The tax rate for qualified dividends is the long-term capital gains rate, which is lower than
ordinary income rates.
Money Market Dividends
• We often think of money market distributions as interest payments since the underlying assets
are generally interest-bearing instruments rather than stock. However, by definition, money
market funds pay dividends not interest.
• Even municipal money market funds, which contain municipal bonds and US Treasury money
market funds that hold US government securities, pay dividends and not interest.
• Payments from money market funds do not qualify for the lower income tax rate of qualified
Mutual Fund Dividends
• Mutual funds can distribute ordinary dividends, ordinary dividends that meet the criteria as
qualified dividends, short-term capital gain dividends and long-term capital gain dividends.
• The source of the funds determines the type of dividend it is.
For example, if a mutual fund holds a security over a year and then sells it generating a
long-term capital gain, the profits are paid out to the mutual fund owners as a long-term
capital gain dividend.
The tax rates that apply are as follows:
o Ordinary dividend – ordinary income tax rate
o Qualified dividend – long-term capital gain rate
o Short-term capital gain dividend – ordinary income tax rate
o Long-term capital gain dividend – long-term capital gain rate
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