How Dividends Are Taxed and What You Owe
Yes, most dividends are taxable income
Dividends are taxed as income by the federal government, and in most states by state governments too. The amount you owe depends on what type of dividend you receive and how long you held the stock. A dividend from a stock you bought last month is taxed differently than a dividend from a stock you have owned for years.
The IRS treats dividends in two broad categories: may have access to dividends and ordinary dividends. may have access to dividends get a lower tax rate — the same rate applied to long-term capital gains. Ordinary dividends are taxed at your regular income tax rate, which is usually higher. Whether your dividend qualifies depends on the type of stock and how long you held it before the dividend was paid.
Key Takeaways
- may have access to dividends from U.S. stocks are taxed at 0%, 15%, or 20% depending on your income, while ordinary dividends are taxed at your regular income tax rate.
- To may have access to for the lower rate, you must have owned the stock for more than 60 days during the 121-day window around the dividend payment date.
- Dividends from bonds, preferred stocks, and real estate investment trusts are usually taxed as ordinary income at your full tax rate.
- Your brokerage sends you a Form 1099-DIV each January showing what you received and how it should be taxed.
- Dividends held in retirement accounts like 401(k)s and IRAs are not taxed until you withdraw the money.
may have access to dividends and the lower tax rate
A may have access to dividend is a dividend from a U.S. corporation or a may have access to foreign corporation that meets the IRS holding period rule. If you owned the stock for more than 60 days during the 121-day window centered on the ex-dividend date, the dividend qualifies. The ex-dividend date is the date by which you must own the stock to receive that particular dividend payment.
may have access to dividends are taxed at the long-term capital gains rate, which is 0%, 15%, or 20% depending on your total taxable income for the year. For most individual investors, the rate is 15%. This is significantly lower than the ordinary income tax rate, which can reach 37% at the highest bracket. The exact rate you pay depends on your filing status and total income, not on how much dividend income you received.
Most dividends from large U.S. companies may have access to. The catch is the holding period: if you buy a stock, collect one dividend, and sell it within 60 days, that dividend will not may have access to and will be taxed as ordinary income instead.
Ordinary dividends and full income tax rates
An ordinary dividend is any dividend that does not meet the may have access to dividend rules. These are taxed at your regular income tax rate — the same rate applied to wages, interest, and other ordinary income. If you are in the 24% tax bracket, ordinary dividends are taxed at 24%. If you are in the 32% bracket, they are taxed at 32%.
Dividends from bonds, preferred stocks, and real estate investment trusts (REITs) are almost always ordinary dividends. So are dividends from stocks you held for 60 days or fewer. Dividends from foreign corporations that do not meet IRS requirements are also taxed as ordinary income, even if you held the stock for years.
Your brokerage will tell you which dividends are may have access to and which are ordinary on your Form 1099-DIV, sent in January. You do not have to figure this out yourself — the form breaks down the amounts for you.
Dividends in taxable accounts versus retirement accounts
If you own stocks in a regular brokerage account — sometimes called a taxable account — you owe tax on dividends in the year you receive them. You report the income on your tax return and pay tax at the rate that applies to that type of dividend.
If you own stocks in a retirement account like a 401(k), traditional IRA, or Roth IRA, dividends are not taxed when you receive them. The money stays invested and grows tax-free (or tax-deferred, depending on the account type). You pay tax only when you withdraw money from the account, and the rules for that withdrawal depend on the account type and your age.
This is one reason retirement accounts are valuable for dividend-paying stocks: the dividends can compound without being reduced by annual taxes. An investor who receives $500 in dividends in a taxable account might owe $75 to $185 in taxes, leaving only $315 to $425 to reinvest. The same $500 in a retirement account stays fully invested.
State income tax on dividends
Most states tax dividend income the same way the federal government does — as ordinary income at your state income tax rate. A few states have special rules. Some states tax may have access to dividends at a lower rate than ordinary income. A handful of states do not tax dividend income at all.
Your state tax rate depends on where you live and file taxes, not where the company is located. If you live in a state with no income tax, you owe no state tax on dividends. If you live in a state with a 5% income tax, you owe 5% state tax on ordinary dividends (in addition to federal tax). Check your state's tax authority website or your most recent state tax return to see how your state treats dividends.
How to report dividends on your tax return
Your brokerage sends you a Form 1099-DIV in January for the previous year. This form shows the total amount of ordinary dividends, may have access to dividends, and any other distributions you received. You use this form to fill out your tax return.
If you use tax software, you enter the amounts from the 1099-DIV and the software calculates your tax. If you file by hand or with a tax professional, you report the may have access to dividends on Schedule B (if you have more than $1,500 in interest and dividends) or directly on Form 1040. Ordinary dividends are reported separately from may have access to dividends so they are taxed at the correct rate.
Keep your 1099-DIV with your tax records. You do not send it to the IRS, but you need it to file your return accurately. If you receive dividends from multiple brokerages, you will receive multiple 1099-DIVs — one from each brokerage.
Strategies to manage dividend taxes
Holding stocks long enough to may have access to for the lower dividend tax rate is the simplest way to reduce your tax bill. If you plan to hold a stock for years, the 60-day holding period is easy to meet. If you trade frequently, you may find that many of your dividends are taxed as ordinary income.
Placing dividend-paying stocks in retirement accounts removes the annual tax burden entirely. If you have a choice between holding growth stocks (which rarely pay dividends) in a taxable account and dividend stocks in a retirement account, the dividend stocks usually belong in the retirement account.
Tax-loss harvesting — selling a losing investment to offset gains elsewhere — can reduce your overall tax bill, but it does not directly affect dividend taxes. Reinvesting dividends automatically does not reduce taxes, but it does let your money compound without you having to make new purchases.
Frequently Asked Questions
Do I owe taxes on dividends I reinvest?
Yes. Whether you take the dividend as cash or reinvest it automatically, you owe tax in the year you receive it. The IRS taxes dividends based on when they are paid to you, not on what you do with the money afterward.
What if I received a dividend but sold the stock before the ex-dividend date?
You do not receive a dividend if you do not own the stock on the ex-dividend date. The person who owns it on that date receives the payment. If you sold before the ex-dividend date, you will not see the dividend on your 1099-DIV.
Are dividends from ETFs and mutual funds taxed differently?
ETFs and mutual funds pass through dividends to you, and those dividends are taxed the same way as if you owned the underlying stocks directly. The fund reports may have access to and ordinary dividends separately on your 1099-DIV. Some funds are more tax-efficient than others because they trade less frequently.
Do I owe taxes on dividends if I lost money on the stock?
Yes. Dividend taxes and capital gains or losses are separate. You can receive a dividend and owe tax on it even if the stock price fell and you have an unrealized loss. You can use the loss to offset other gains, but the dividend is still taxable income.
What happens if I do not report dividend income?
The IRS receives a copy of your 1099-DIV from your brokerage and matches it against your tax return. Unreported dividend income is one of the most commonly caught errors. Penalties and interest apply if you owe tax you did not pay.