How dividends are taxed
Two kinds, taxed very differently:
Qualified — taxed at the lower long-term capital gains rates. To qualify, the payer must be a US or qualifying foreign corporation AND you must have held the shares for a minimum period around the ex-dividend date.
Ordinary (non-qualified) — taxed as regular income. This includes most REIT distributions, money-market and bond fund interest, and dividends on shares you did not hold long enough.
What this means in practice:
• REITs are often better held in a sheltered account, because their income is taxed at your full rate
• Chasing dividends in a taxable account creates a tax bill whether or not you wanted the cash
• Reinvested dividends are still taxed — you owe on money you never saw
Chart: the same $1 of dividend, illustrative rates.