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There seems to be some inconsistency in the usage of the term "ordinary dividends". (I'm considering the United States tax system.)

Most online sites seem to define the terms "ordinary dividend" and "qualified dividend" as mutually exclusive, with ordinary dividends being taxed at ordinary income tax rates and qualified dividends being taxed at the long-term capital gains tax rate. For example, the site linked above says that the terms "ordinary dividend" and "non-qualified dividend" are synonymous.

But U.S. tax forms seem to treat both qualified dividends and non-qualified dividends as a subset of "ordinary dividends". For example, I believe that on the Form 1040 (for tax year 2021), in box 3b for "ordinary dividends", you are supposed to include the value of the "qualified dividends" listed in box 3a. Similarly, my form 1099-DIV provided by my financial institution describes line 1a as "Total ordinary dividends (includes lines 1b, 5, 2e)", where line 1b is "Qualified dividends".

My two questions:

  1. Am I correct that the usage of the term "ordinary dividends" is simply inconsistent, and some people use that term to include qualified dividends and others don't?
  2. If so, then under the usage where the term "ordinary dividends" does include qualified dividends, what's considered to be a "non-ordinary" dividend?
tparker
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2 Answers2

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Am I correct that the usage of the term "ordinary dividends" is simply inconsistent, and some people use that term to include qualified dividends and others don't?

Yes, I think a lot of people blogging on the internet frequently misuse terms. Myself included.

If so, then under the usage where the term "ordinary dividends" does include qualified dividends, what's considered to be a "non-ordinary" dividend?

The terms are not mutually exclusive, and Investopedia is not infallible. A lot of articles seem to do what Investopedia did and consider Ordinary and Qualified as two different classifications when that's not the case under the current rules, and rules change. It could be that "ordinary" mattered for some reason at some point in the past and it remains in IRS literature because of it; but it definitely does not matter now.

The problem is a company can't issue a "qualified" dividend, it can only issue dividends. A dividend payment might be qualified based on your specific holding circumstances. If you hold your stock within some criteria, dividends paid by that stock are "qualified" and the current rules allow you to pay a reduced rate. Some dividends can never be "qualified," like dividends received from a REIT.

When you report your income to the IRS, you'll report All dividend payments and some of the dividend payments may be qualified depending on your holding period. Your broker will generally track whether or not any your dividend payment receipts meet the "qualified" rules for you.

From a corporate governance standpoint, a company may call a dividend all sorts of things like normal, ordinary, regular, special, etc. They're all just dividends to the IRS. But generally a "special dividend" tends to refer to a one-time payment while the predictable quarterly dividend will be called something like normal, ordinary, or regular. But none of these names matter for taxes, "special" has nothing to do with how the payment you received is taxed.

Generally for an individual investor the thing that matters is, dividends received from stock you held for a sufficient period of time surrounding the dividend payment are qualified and qualified dividends are taxed as long-term capital gains. All of the terms except "qualified" are irrelevant.

quid
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Am I correct that the usage of the term "ordinary dividends" is simply inconsistent, and some people use that term to include qualified dividends and others don't?

The usage is consistent with the definition. Since there's no legal definition of "ordinary dividend", you'll need to check how whoever uses it defines it. The article you linked to defines "ordinary dividends" as "dividends that are not qualified dividends".

Look at the instructions to form 1040 for the IRS definitions with regards to lines 3a and 3b on the form:

Qualified Dividends

Enter your total qualified dividends on line 3a. Qualified dividends are also included in the ordinary dividend total required to be shown on line 3b.

The IRS considers "ordinary dividends" to be all dividends, and "qualified dividends" to be the dividends with the preferential tax treatment.

If so, then under the usage where the term "ordinary dividends" does include qualified dividends, what's considered to be a "non-ordinary" dividend?

I'm not sure I understand what you mean, I think you're asking "when ordinary dividends include all dividends - what's considered dividends that are not ordinary"? Well, as you've realized: nothing. However other payments that investor may treat as dividends would not be included: payments in lieu, returns of capital, capital gains distributions, etc.

littleadv
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