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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?
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    The investopedia article defines what they see as "qualified" dividends and the "ordinary" dividends. The IRS, as I show in my answer, sees "qualified" dividend as a subset of "ordinary" dividend - any dividend is "ordinary", but some may qualify for preferential treatment. How each source defines its terms is up to the source.
    – littleadv
    Apr 4, 2022 at 20:12
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    The question can be sharpened considerably because the IRS itself is inconsistent: "Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates."
    – nanoman
    Apr 4, 2022 at 20:21
  • @nanoman "or" doesn't mean mutually exclusive. See here: en.wikipedia.org/wiki/Logical_disjunction
    – littleadv
    Apr 4, 2022 at 20:36
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    @littleadv But it says "ordinary dividends are taxable as ordinary income", implying ordinary dividends are non-qualified.
    – nanoman
    Apr 4, 2022 at 20:38
  • @nanoman I agree that the writing could be better, but that's not really a legal authority. As a general explanation this seems pretty clear to me. From legal perspective, the same dividend can only be taxed either as ordinary income or as qualified income, but not both.
    – littleadv
    Apr 4, 2022 at 20:41

2 Answers 2

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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.

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  • So you're saying that in the IRS's usage, the distinction between an "ordinary" and a "special" dividend has to with the regularity with which it's issued? But you still need to report these one-time-event dividends on Form 1040 box 3b and Form 1099 box 1a, correct? If that's correct (and I think it is), then that means that the IRS considers these one-time-event dividends to be "ordinary" as well.
    – tparker
    Apr 5, 2022 at 0:57
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    @tparker When you report your dividend income to the IRS, you report all of your dividend payments regardless of what they're called as ordinary dividends, because that's what the rules say. Then you report your qualified dividends, which will be some amount of your ordinary dividends. The IRS outlines criteria under which you can classify your dividend receipts as qualified if you meet the holding period the specified holding period. This qualification is specific to you and how you held the stock. All of the names, except for "qualified" are completely irrelevant.
    – quid
    Apr 5, 2022 at 1:30
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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.

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    This does not answer the actual question (items 1 and 2 at the end). The question already notes that "ordinary dividends" as defined by the tax forms include qualified dividends.
    – nanoman
    Apr 4, 2022 at 20:04
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    OP did reference it, with an Investopedia link. Also you didn't answer what a non-ordinary dividend is. Do you think there is no type of dividend in existence that isn't "ordinary", and in that case, what is the point of the word "ordinary"?
    – nanoman
    Apr 4, 2022 at 20:16
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    @tparker ok, added some more. feel free to clarify your questions if you still feel that I'm answering something other than you intended. Or ignore me, I'm an internet rando, not a cop.
    – littleadv
    Apr 5, 2022 at 0:53
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    Respectfully - I mean this as a genuine, non-rhetorical question - is there any possible way that one is supposed to know that fact without doing a deep dive into the intricacies of the US tax code? Both the IRS instructions and every other source I’ve seen discuss the terms “ordinary” and “qualified” on perfectly equal footing. Is there some way for a non-legal-expert to gather that one of those words has a precise legal meaning and the other is “meaningless”, other than noting that the IRS uses one term inconsistently?
    – tparker
    Apr 5, 2022 at 9:01
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    Basically, the underlying disconnect here between us is that it seems very obvious to me that the IRS instructions are inconsistent and confusing, but you keep seeming to imply that they’re perfectly consistent and reasonable. I’m just trying to understand if there’s some underlying fact that you understand which I don’t, which makes the IRS instructions not only consistent by the formal rules of logic, but actually make sense to the ordinary people they’re directed at.
    – tparker
    Apr 5, 2022 at 9:09

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