How are dividends and capital gains taxed for qualified dividends and long-term capital gains?

• A. Dividends are taxed only as ordinary income; capital gains taxed at 20%
• B. Qualified dividends are taxed at a maximum rate of 15%, and long-term capital gains are taxed at their long-term rates
• C. Dividends are exempt from tax; capital gains taxed at 0%
• D. Dividends and capital gains are taxed identically

Answer: (B)

Dividends and capital gains enjoy preferential tax treatment when certain conditions are met. Qualified dividends are taxed at lower rates than ordinary income, generally up to 15% for most taxpayers. Long-term capital gains from assets held longer than one year are taxed at long-term rates, which are 0%, 15%, or 20% depending on income.

So the statement that qualified dividends are taxed at a maximum rate of 15%, and long-term capital gains are taxed at their long-term rates, matches how these two types of income are treated under current rules. It’s different from ordinary dividends, which can be taxed at higher ordinary-income rates, and from short-term gains or non-qualified dividends, which don’t receive the same favorable rates.