How Dividends Are Taxed

Yes, dividends are taxed, but the tax rate depends on the type of dividend and how long you held the stock

When a company pays you a dividend, that money counts as income to the IRS. You owe tax on it in the year you receive it. The tax you pay is not the same for every dividend, though — it depends on whether the dividend is may have access to or ordinary, and your income level.

may have access to dividends are taxed at the long-term capital gains rate, which is lower than the ordinary income rate. Ordinary dividends are taxed at your regular income tax rate. To get the lower rate, you must have owned the stock for more than 60 days during a 121-day window around the dividend payment date.

Key Takeaways

• may have access to dividends are taxed at 0%, 15%, or 20% depending on your income; ordinary dividends are taxed at your regular income tax bracket, which can be as high as 37%.
• To may have access to for the lower rate, you must own the stock for more than 60 days in the 121-day period centered on the dividend payment date.
• Dividends from tax-advantaged accounts like 401(k)s and IRAs are not taxed until you withdraw the money, or not at all in a Roth account.
• Your brokerage will send you a Form 1099-DIV in January showing all dividends paid in the prior year, which you use to file your tax return.

may have access to versus ordinary dividends

A may have access to dividend is paid by a U.S. corporation or a foreign corporation whose stock trades on a U.S. exchange, and you meet the holding period. These dividends are taxed at the long-term capital gains rate: 0%, 15%, or 20%, depending on your total taxable income for the year.

An ordinary dividend is everything else — dividends from real estate investment trusts (REITs), master limited partnerships, certain preferred stocks, and any dividend where you did not meet the holding period. These are taxed as ordinary income at your marginal tax rate, which ranges from 10% to 37% depending on your income bracket.

The difference matters. If you are in the 24% ordinary income bracket and receive $1,000 in may have access to dividends, you owe $150 in tax (at the 15% rate). The same $1,000 in ordinary dividends would cost you $240. Your brokerage reports which dividends are may have access to on your Form 1099-DIV.

The holding period rule

To receive the may have access to dividend rate, you must own the stock for more than 60 days during a 121-day window. The window starts 60 days before the ex-dividend date — the date by which you must own the stock to receive the dividend — and ends 60 days after it.

If you buy a stock two days before the ex-dividend date and sell it three days later, you do not meet the holding period. The dividend is taxed as ordinary income. This rule prevents investors from buying stocks just before a dividend payment and selling immediately after.

The holding period is per dividend, not per stock. You can own a stock for years and still fail the test for a particular dividend if you sold it too soon after the ex-dividend date.

Dividends in retirement and tax-advantaged accounts

Dividends earned inside a 401(k), traditional IRA, or SEP-IRA are not taxed in the year you receive them. They grow tax-deferred until you withdraw the money in retirement, at which point withdrawals are taxed as ordinary income.

Dividends in a Roth IRA or Roth 401(k) are never taxed, as long as you follow the withdrawal rules. You can hold the account for five years and reach age 59½ before withdrawing, and the dividends and all growth come out tax-free.

Because of this tax deferral, holding dividend-paying stocks in a retirement account is often more efficient than holding them in a regular taxable brokerage account. The tax savings compound over time.

Reporting dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 each year, showing all ordinary and may have access to dividends paid during the prior year. You report this on your tax return — usually on Schedule B if you have more than $1,500 in dividends, or directly on Form 1040 if you have less.

The 1099-DIV also reports any capital gains distributions from mutual funds and other income like return of capital. Keep your copy for your records and make sure the amounts match your brokerage statement.

If you did not receive a 1099-DIV but your brokerage paid dividends, contact them. You need the form to file accurately. If you file without reporting dividends, the IRS will match the 1099-DIV they received and send you a bill for the unpaid tax plus interest.

State and local taxes on dividends

Most states tax dividend income as ordinary income at your state tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividends at all. Others tax only dividends above a certain threshold or tax them at a lower rate than wages.

If you live in a state that taxes dividends, you report them on your state tax return the same way you report them to the IRS. Your brokerage does not withhold state tax, so you may owe it when you file.

Dividend reinvestment and taxes

If you use a dividend reinvestment plan (DRIP) to automatically buy more shares with your dividends, you still owe tax on the dividend in the year you receive it — even though you did not take the cash. The IRS treats the reinvested amount as income to you.

This is a common surprise for new investors. You receive no cash but owe tax on the full dividend amount. Keep records of your DRIP purchases because they become part of your cost basis when you eventually sell the shares.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. The IRS taxes dividends in the year you receive them, regardless of whether you take the cash or reinvest it. If you use a DRIP, you still owe tax on the full dividend amount, even though no money came to you.

What is the difference between the 0%, 15%, and 20% may have access to dividend rates?

The rate depends on your total taxable income for the year. The 0% rate applies to lower-income filers, 15% to middle-income filers, and 20% to high-income filers. Your tax software or accountant can tell you which bracket you fall into based on your other income.

Can I avoid taxes on dividends by holding the stock longer?

Holding longer does not reduce the tax rate — only the 60-day holding period matters for may have access to dividends. However, holding longer can reduce your overall tax if the stock appreciates, because you can use long-term capital gains rates when you sell.

Do I owe federal tax on dividends from foreign stocks?

It depends. Dividends from foreign corporations are usually taxed as ordinary income unless the foreign country has a tax treaty with the U.S. Some countries withhold tax on dividends paid to U.S. investors, which you can claim as a credit on your return.

How do I report dividends if I have accounts at multiple brokerages?

Each brokerage sends you a separate 1099-DIV. You add up all the dividends from all your accounts and report the total on your tax return. The IRS receives copies of all your 1099-DIVs, so make sure your return matches the total they see.