Yes, Ordinary Dividends Are Taxable — Here's What You Owe
Ordinary dividends are taxed as ordinary income at your regular tax rate
Yes, ordinary dividends are taxable. The IRS treats them as ordinary income, which means they are taxed at the same rate as your wages, salary, or other regular earnings. If you receive $500 in ordinary dividends and you are in the 22% tax bracket, you owe tax on that $500 at the 22% rate — not at a lower rate.
This is different from may have access to dividends, which receive preferential tax treatment and are taxed at lower capital gains rates (0%, 15%, or 20%, depending on your income). Most dividends from bonds, preferred stocks, and money market funds are ordinary dividends. Dividends from regular common stocks are usually may have access to dividends, but can be ordinary under certain conditions.
Your brokerage or fund company will tell you which dividends are ordinary and which are may have access to on Form 1099-DIV, which you receive by January 31 each year. You report both types on your tax return, but they are taxed differently.
Key Takeaways
- Ordinary dividends are taxed as regular income at your full marginal tax rate, not at the lower capital gains rates.
- Your brokerage reports ordinary dividends on Form 1099-DIV, box 1a, separate from may have access to dividends in box 1b.
- Dividends from bonds, preferred stocks, money market funds, and REITs are usually ordinary dividends.
- You owe tax on ordinary dividends even if you reinvest them back into the fund or stock.
Which dividends count as ordinary, not may have access to
A dividend is ordinary if it does not meet the IRS rules for may have access to status. The main rule is that you must have held the stock for more than 60 days during a 121-day window centered on the ex-dividend date. If you held it for fewer days, the dividend is ordinary even if it comes from a stock that usually pays may have access to dividends.
Dividends from bonds are almost always ordinary. This includes Treasury bonds, corporate bonds, and municipal bonds (though municipal bond interest is usually tax-free for other reasons). Dividends from preferred stocks are ordinary unless they meet the same holding-period test as common stocks. Dividends from money market funds, bond funds, and balanced funds are ordinary because the underlying holdings are mostly bonds.
Real estate investment trusts (REITs) pay ordinary dividends by law. Even though REITs own real estate, the tax code requires their dividends to be taxed as ordinary income. Some REITs also pay capital gains distributions, which are taxed differently, but the regular dividend portion is ordinary.
How ordinary dividends affect your tax bracket and overall tax bill
Ordinary dividends are added to your other income for the year and taxed at your marginal rate — the rate that applies to your highest dollar of income. If you earn $60,000 in salary and receive $5,000 in ordinary dividends, you are taxed on $65,000 total. The dividends push you into a higher bracket if they cross a threshold, which means some or all of them may be taxed at a higher rate than your salary.
This can matter significantly. If you are in the 12% bracket and ordinary dividends push you into the 22% bracket, those dividends are taxed at 22%, not 12%. In contrast, may have access to dividends are taxed at capital gains rates (0%, 15%, or 20%) regardless of your ordinary income bracket, so they do not push you into a higher bracket in the same way.
If you have a low income year — perhaps you retired mid-year or took unpaid leave — ordinary dividends may be taxed at a lower rate that year. The tax you owe depends on your total income for that specific year, not on the amount of the dividend itself.
Reporting ordinary dividends on your tax return
Your brokerage or fund company sends you Form 1099-DIV by January 31. Box 1a shows ordinary dividends; box 1b shows may have access to dividends. You report both on Schedule B (Interest and Ordinary Dividends) if your ordinary dividends exceed $1,500, or you can report them directly on Form 1040 if they are $1,500 or less.
If you have dividends from multiple sources, add them all together. The $1,500 threshold applies to your total ordinary dividends for the year, not to each source separately. If you have $800 from one fund and $900 from another, you have $1,700 in ordinary dividends and must file Schedule B.
may have access to dividends go on a different line of your return (Schedule B, line 5b, or Form 1040, line 5b). Your tax software will separate them automatically if you enter the 1099-DIV information correctly. Do not mix ordinary and may have access to dividends on the same line.
Ordinary dividends you reinvest are still taxable
If your brokerage or fund automatically reinvests your dividends — buying more shares instead of sending you cash — you still owe tax on the full dividend amount that year. The IRS taxes the dividend when you receive it (or are deemed to receive it), not when you sell the shares later.
This is a common surprise for new investors. You may think that reinvesting means you do not owe tax until you sell, but that is not how it works. You owe tax on the dividend in the year it is paid, whether you take it in cash or reinvest it. When you eventually sell those reinvested shares, you will owe capital gains tax on any increase in value above the price you paid for them.
Keep records of reinvested dividends. They increase your cost basis in the fund or stock, which reduces your taxable gain when you sell. If you do not track them, you may pay tax twice on the same money.
Tax-advantaged accounts reduce or eliminate tax on ordinary dividends
If you hold dividend-paying investments inside a 401(k), traditional IRA, Roth IRA, or other tax-advantaged account, you do not owe tax on the dividends in the year they are paid. The dividends stay inside the account and compound tax-free (or tax-deferred, depending on the account type).
This is one reason investors often hold bond funds and dividend-paying stocks in IRAs or 401(k)s rather than in regular taxable accounts. Ordinary dividends, which are taxed at your full rate, benefit especially from this shelter. may have access to dividends, which are already taxed at lower rates, benefit less.
When you withdraw money from a traditional IRA or 401(k), you pay tax on the withdrawal at your ordinary income rate, regardless of whether the money came from dividends, capital gains, or interest. Roth accounts allow tax-free withdrawals in retirement, so dividends inside a Roth are never taxed.
State and local taxes on ordinary dividends
Most states tax ordinary dividends 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. Other states tax dividends at a lower rate than wages, or tax them only if they exceed a certain amount.
Your state tax bill on dividends depends on where you live and file taxes, not where the company paying the dividend is located. If you live in New York and own stock in a California company, you pay New York tax on the dividend, not California tax. Some cities also tax dividends, though this is less common.
Check your state's tax rules if you receive significant ordinary dividends. The difference between a state that taxes dividends and one that does not can be substantial over time.
Frequently Asked Questions
Do I owe tax on ordinary dividends if I do not sell the stock?
Yes. You owe tax on the dividend in the year you receive it, regardless of whether you sell the stock, hold it, or reinvest the dividend. The tax is on the dividend payment itself, not on selling the shares.
What is the difference between ordinary and may have access to dividends in terms of taxes?
Ordinary dividends are taxed at your regular income tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2024). may have access to dividends are taxed at capital gains rates (0%, 15%, or 20%), which are lower. Most dividends from common stocks are may have access to if you held the stock long enough; dividends from bonds and preferred stocks are usually ordinary.
Can I deduct ordinary dividend losses?
No. You cannot deduct the amount of a dividend as a loss. If a stock pays a dividend and then drops in value, you owe tax on the dividend but cannot offset it with the stock's decline. You can deduct a capital loss only when you sell the stock for less than you paid for it.
Do I have to report ordinary dividends under $1,500?
If your ordinary dividends are $1,500 or less, you can report them directly on Form 1040 without filing Schedule B. However, you must still report them — the $1,500 threshold is about which form to use, not whether to report them at all.
What happens if I receive a 1099-DIV with the wrong amount?
Contact your brokerage or fund company immediately and ask for a corrected form. They will issue a corrected 1099-DIV (marked as such) and file it with the IRS. You should also file an amended return if you already filed. Do not ignore the discrepancy — the IRS receives a copy of the 1099-DIV and will match it to your return.