Content courtesy of Dimensional Fund Advisors. Authors are Karen Umland, Senior Investment Director and Vice President, and Ashley Cruz, Senior Investment Strategist and Vice President.
When it comes to taxes, not all dividend income is the same. Qualified and non-qualified dividends have different implications for your portfolio’s tax efficiency in a similar manner as HDL and LDL cholesterol have different implications for your health.
Qualified income, or QDI, is generally taxed at lower rates than non-qualified income (NQDI). In 2025, the maximum tax rate for NQDI was 40.8%, compared to 23.8% for QDI.(Footnote 1) Like LDL, the “bad kind” of cholesterol, it’s beneficial to have strategies to keep NQDI in check. For a portfolio manager, increasing the percentage of total income that is qualified starts with understanding the sources of income in a portfolio.
NQDI can arise from several sources. One is the type of securities the portfolio may hold. For example, income from real estate investment trusts (REITs) is typically treated as NQDI. Another source is trading activity. Having the flexibility to consider minimum holding periods around dividend payment dates when buying and selling securities can help reduce unnecessary NQDI.
Maximizing the extent to which income is qualified can be beneficial for tax outcomes, just as tracking your cholesterol can help improve health outcomes.
Footnote 1. Assumes highest marginal tax rates of 20% for QDI and 37% for NQDI and an additional 3.8% net investment income tax. Alternative minimum tax and/or state and local taxes may also apply.
Disclosures
All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. Diversification neither assures a profit nor guarantees against loss in a declining market.
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This information is intended expressly for discussion purposes only and should not be misconstrued or otherwise interpreted as tax advice. Please consult with a qualified tax professionals regarding your individual circumstances.