How Dividend ETFs Are Taxed

April 15 is right around the corner and all of us are biting are nails to get our 1040s filed and minimize what we owe Uncle Sam. With this in mind, be sure to treat the dividends that you receive from exchange traded funds (ETFs) in the proper manner.

For those of you who aren’t tax literate, dividends generally come in two forms - qualified and non-qualified. Qualified dividends are the ones that most of us like because they are taxed at a lower tax rate, which is 15% for the highest of earners. As for non-qualified dividends, they are taxed at ordinary income rates, which can be a lot higher than 15%.

Now let’s talk a little about what kind of dividends ETFs shoot off.  Our first example will be the DIAMONDS Trust Series 1 (DIA), which paid $2.93/share in dividends in 2008. The good news is that all of these dividends were qualified and the reason for this is that DIA owns shares in mostly U.S. dividend-paying companies, states Matt Krantz of USA Today.

A second ETF that we will look at is the SPDR (SPY), which generated both qualified and non-qualified dividends.  In 2008, SPY paid $2.72/share in dividends, of which $2.33 were qualified.  The reason that SPY shoots off some non-qualified dividends is because it owns some real-estate-investment-trusts (REITs), which pay non-qualified dividends.

When it comes to choosing ETFs, it is always wise to know what the tax implications of your choices are.  As for filing your 1040 accurately, we would recommend that you consult your accountant, as we are not tax professionals.

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