Do mutual funds distribute Qualified Dividends?

Mutual funds are able to pass through Qualified Dividend Income they receive to their shareholders. Qualified dividends include actual dividends passed through from mutual funds holdings but does not include interest or short-term capital gains (despite the fact that these latter two items are also reported as dividend income).

Is there a holding period requirement for qualified dividends from mutual funds shares?

Yes. Even though dividends are reported to mutual funds and unit investment trust shareholders as qualified dividends on 1099-DIV Form, they are not qualified dividends for tax purposes unless the mutual funds or unit trust shareholder has met the more than 60-day holding period requirement for the fund or trust shares owned. In other words, in order for a mutual fund shareholder to receive a qualified dividend it must be a qualified dividend both to the fund and the shareholder. Both the fund and the shareholder must meet the more than 60-day holding period requirement.

The following example is from the 2003 - 1040 form Instructions:

You bought 10,000 shares of ABC Mutual Fund on July 1, 2003. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 9, 2003. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your 1099-DIV form from ABC Mutual Fund shows total ordinary dividends of$1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 4, 2003. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.