What tax rate is applied to non-qualified dividends?

The tax rate applied to non-qualified dividends is equal to federal income tax rates. Non-qualified dividends, which include dividends from most ordinary stocks, mutual funds, and other non-REIT investments, are treated as ordinary income for tax purposes. This means they are taxed at the individual's marginal tax rate based on their overall income level.

The rationale for this treatment is that non-qualified dividends do not meet certain criteria to qualify for the lower capital gains tax rates. As such, they are integrated into the standard income tax brackets that apply to a taxpayer's ordinary income. This results in the tax rate on non-qualified dividends aligning with the individual's tax bracket, which can fluctuate from 10% to 37%, depending on their total taxable income.

This different treatment from qualified dividends, which can be taxed at lower rates (0%, 15%, or 20% depending on the taxpayer's income level) highlights the importance of understanding the distinction between the two types of dividends for accurate tax planning and reporting.