How Dividends Are Taxed and What You Owe

Dividends are taxed as income, but the rate depends on the type of dividend and how long you held the stock

When you receive a dividend, the IRS treats it as income you must report on your tax return. The tax you pay on that income falls into one of two categories: ordinary income tax rates or may have access to dividend rates. Which category applies to you determines whether you pay 10% to 37% of the dividend (ordinary rates) or 0%, 15%, or 20% (may have access to rates). The difference can be substantial on a large dividend payment.

The type of dividend matters most. A may have access to dividend — one paid by a U.S. corporation or may have access to foreign corporation on stock you held for more than 60 days around the payment date — gets the lower rate. Everything else — dividends from REITs, master limited partnerships, most bond funds, and stocks you held too briefly — is taxed as ordinary income at your full marginal rate.

You report dividends on your tax return whether you reinvest them or take them as cash. The IRS does not care what you do with the money; it only cares that you received it. Your brokerage sends you a Form 1099-DIV each January listing all dividends paid in the prior year, and you use that to fill out your return.

Key Takeaways

• may have access to dividends from stocks held longer than 60 days are taxed at 0%, 15%, or 20% depending on your income bracket, while ordinary dividends are taxed at your full marginal rate.
• Dividends from REITs, master limited partnerships, and most bond funds are always taxed as ordinary income, even if the underlying investment is held long-term.
• You owe tax on dividends in the year they are paid, regardless of whether you reinvest them or spend them.
• Your brokerage reports all dividends on Form 1099-DIV, which you use to complete your tax return.
• Tax-advantaged accounts like 401(k)s and IRAs defer or eliminate dividend taxes entirely.

may have access to dividends and the lower tax rates

A may have access to dividend receives preferential tax treatment because Congress wanted to encourage long-term stock ownership. To may have access to, two conditions must be met: the dividend must come from a may have access to corporation, and you must have held the stock for more than 60 days during the 121-day window centered on the ex-dividend date.

Most dividends from U.S. companies meet the corporation requirement. Dividends from foreign companies may have access to only if the company is incorporated in a U.S. possession or trades on a major U.S. exchange. Your brokerage typically marks may have access to dividends separately on your 1099-DIV, so you do not have to track the holding period yourself — though you should verify the designation if you bought or sold the stock near the ex-dividend date.

The tax rate on may have access to dividends depends on your taxable income and filing status. For 2024, the 0% rate applies to single filers with taxable income up to $47,025, the 15% rate applies to income between $47,025 and $518,900, and the 20% rate applies above that. These brackets adjust annually for inflation. If your income is low enough to fall in the 0% bracket, you owe no federal tax on may have access to dividends at all.

Ordinary dividends taxed at your full rate

Any dividend that does not meet the may have access to definition is taxed as ordinary income at your marginal tax rate — the same rate you pay on wages or interest. This includes dividends from REITs, master limited partnerships (MLPs), preferred stocks issued before 2003, and most mutual funds that distribute short-term capital gains.

Bond funds and money market funds almost always pay ordinary dividends, even if you hold them for years. The fund itself may hold long-term bonds, but the dividend distribution is still taxed as ordinary income to you. This is one reason investors in high tax brackets sometimes prefer individual bonds over bond funds — the interest on a bond you hold to maturity is ordinary income, but you control when you receive it rather than having the fund force a distribution on you.

Ordinary dividend rates range from 10% to 37% depending on your income bracket and filing status. A high-income investor in the 37% bracket pays 37 cents in federal tax on every dollar of ordinary dividend income, compared to 20 cents on may have access to dividends. Over time, this difference compounds.

State and local taxes on dividends

Federal tax is only part of the picture. Most states tax dividend income as well, though the rate and treatment vary widely. Some states tax dividends at the same rate as ordinary income; others offer a lower rate or exemption. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no income tax at all.

If you live in a state with income tax, check your state's rules on dividend treatment. Some states follow federal law and tax may have access to dividends at a lower rate; others do not. New York, for example, taxes all dividends as ordinary income regardless of federal qualification. Your state tax bill can be as large as your federal bill, so the state rules matter when you decide where to hold dividend-paying investments.

How dividends are reported and tracked

Your brokerage sends you a Form 1099-DIV by January 31 each year, listing all dividends paid during the prior calendar year. The form breaks dividends into categories: ordinary dividends, may have access to dividends, capital gain distributions, and others. You use this form to complete your tax return.

If you own dividend-paying stocks or funds through multiple brokerages, you will receive a separate 1099-DIV from each one. You must add up all the dividends across all your accounts and report the total on your return. The IRS receives a copy of every 1099-DIV, so misreporting or omitting a dividend creates a mismatch that can trigger an audit notice.

Keep your 1099-DIVs and brokerage statements for at least three years. If the IRS questions your return, you will need to show the original documents. If you reinvest dividends automatically, your statement will show the reinvestment as a purchase at the dividend amount, which affects your cost basis when you eventually sell the shares.

Dividends in tax-advantaged accounts

Dividends paid inside a 401(k), traditional IRA, or Roth IRA are not taxed in the year they are received. In a traditional 401(k) or IRA, the dividends grow tax-deferred and you pay ordinary income tax on the full amount when you withdraw it in retirement. In a Roth IRA, dividends grow tax-free and you owe no tax on withdrawals at all, provided you follow the withdrawal rules.

This tax deferral is one reason tax-advantaged accounts are powerful for long-term investing. A dividend-paying stock inside a Roth IRA compounds without any tax drag, whereas the same stock in a taxable account forces you to pay tax on the dividend each year, reducing the amount available to reinvest. Over decades, this difference becomes very large.

If you have a choice between holding a high-dividend stock in a taxable account or a tax-advantaged account, the tax-advantaged account is usually the better choice. Conversely, if you have limited room in a tax-advantaged account, growth stocks that pay no dividend are often better candidates because they defer gains until you sell, whereas dividends force an annual tax bill.

Dividend income and tax brackets

Dividend income counts toward your total taxable income for the year, which can push you into a higher tax bracket. If you are near the edge of a bracket, a large dividend payment might increase your tax rate on all your income, not just the dividend itself. This effect is usually small, but it is worth checking if you receive a substantial dividend in a single year.

may have access to dividends are stacked on top of ordinary income when calculating your bracket. If you earn $50,000 in wages and receive $10,000 in may have access to dividends, your taxable income is $60,000. The may have access to dividends are taxed at the 15% rate (assuming you are in that bracket), but they still count toward the $60,000 total that determines your bracket for other income.

Some taxpayers use this to their advantage by timing the sale of appreciated securities or the receipt of bonuses to smooth income across years. This strategy is complex and depends on your specific situation, so discuss it with a tax professional if you have large, irregular income sources.

Frequently Asked Questions

Do I owe tax on dividends I reinvest?

Yes. The IRS taxes dividends in the year they are paid, regardless of whether you take the cash or reinvest it. Your brokerage automatically reinvests the dividend if you have that option selected, but you still owe tax on the full amount. This is why tax-advantaged accounts are valuable for dividend reinvestment — the tax is deferred or eliminated entirely.

What is the difference between may have access to and ordinary dividends?

may have access to dividends are taxed at preferential rates (0%, 15%, or 20%) if you held the stock for more than 60 days around the ex-dividend date and the company qualifies. Ordinary dividends are taxed at your full marginal rate (10% to 37%). Dividends from REITs and most bond funds are always ordinary, even if held long-term.

Can I avoid dividend taxes by holding the stock in a different account?

You cannot avoid federal tax on dividends in a taxable brokerage account, but you can defer or eliminate it by holding the stock in a 401(k) or IRA. In a traditional account, tax is deferred until withdrawal. In a Roth IRA, dividends grow and can be withdrawn tax-free if you follow the rules.

What happens if my brokerage reports the wrong dividend amount on my 1099-DIV?

Contact your brokerage immediately and ask them to issue a corrected Form 1099-DIV. If you have already filed your return, you may need to file an amended return (Form 1040-X) once the corrected form is issued. Keep documentation of the error and the correction in case the IRS questions your return.

Do I owe tax on dividend reinvestment?

Yes, you owe tax on the full dividend amount in the year it is paid, even if you automatically reinvest it. The reinvestment does not change your tax obligation. However, the reinvested shares increase your cost basis, which reduces your taxable gain when you eventually sell the stock.