Tax & EvaluationQuestion 94 of 110
Qualified dividends distributed by an equity mutual fund to a taxable account are generally taxed:
a.At the lower long-term capital gains rates, if the applicable holding period requirements are met
b.At the investor's ordinary income rate in all cases
c.Not at all, because the fund already paid tax on them
d.Only when the investor eventually sells the fund shares
Explanation
Dividends that meet the qualified dividend requirements receive the favorable long-term capital gains rates rather than ordinary income treatment. Non-qualified dividends, including most interest income passed through by bond funds, are taxed as ordinary income. A regulated investment company generally pays no entity-level tax on distributed income, so the shareholder is the taxpayer.
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