A fund receives ordinary income generally in the form of dividends and interest on its investments in portfolio securities. This income, less the fund's operating expenses, constitutes the fund's net investment income from which dividends may be paid to shareholders. Dividends are reported on IRS Form 1099-DIV. Look for this form to arrive by mid-February. Two types of income dividends can be paid out:
Ordinary dividends are taxed at an investor's ordinary income tax rate.
Qualified dividends that meet certain requirements are taxed at lower capital gain rates. When a fund receives dividends from domestic corporations and qualified foreign corporations and certain holding periods are met, they are considered qualified dividend income. Qualified dividend income is taxed at rates of 0%, 15%, or 20% depending on your taxable income, as shown in the table below. See the IRS Form 1040 instructions for more details.
Qualified dividend taxation rate for 2023*
|
Taxable income
|
|
Qualified dividends
taxation rate
|
|
Individuals |
Married/filing jointly
|
|
| $0–$44,625 |
$0–$89,250 |
0%
|
| $44,626–$492,300 |
$89,251–$553,850 |
15%
|
| Over $492,300 |
Over $553,850 |
20%
|
* An additional 3.8% Medicare tax may be imposed on certain net investment income to the extent the recipient's
gross income exceeds a threshold amount.