How Ordinary Dividends Are Taxed as Regular Income

Ordinary dividends are taxed at your regular income tax rate, not at the lower capital gains rate

When you receive an ordinary dividend from a stock or mutual fund, the IRS treats it as ordinary income. That means it is taxed at the same rate as your salary, wages, or other earnings — which can be 10%, 12%, 22%, 24%, 32%, 35%, or 37%, depending on your total income and filing status. This is different from may have access to dividends, which get a preferential rate of 0%, 15%, or 20%.

Your brokerage will report ordinary dividends to you on a Form 1099-DIV, and you report them on your tax return. The tax is owed in the year you receive the dividend, even if you reinvest it immediately back into the fund.

Key Takeaways

• Ordinary dividends are taxed as ordinary income at your marginal tax bracket rate, which is higher than the rate for may have access to dividends.
• Your brokerage reports ordinary dividends on Form 1099-DIV, which you receive by January 31 of the following year.
• You owe tax on ordinary dividends in the year you receive them, regardless of whether you reinvest the money or take it as cash.
• Most dividends from U.S. stocks are may have access to dividends, but dividends from bonds, preferred stocks, and some mutual funds are often ordinary dividends.
• Tax-advantaged accounts like 401(k)s and IRAs shelter ordinary dividends from taxation until you withdraw the money.

Which dividends count as ordinary rather than may have access to

The IRS distinguishes between ordinary and may have access to dividends based on the type of investment and how long you held it. Most dividends from regular U.S. company stocks are may have access to if you held the stock for more than 60 days around the dividend payment date. But dividends from bonds, preferred stocks, real estate investment trusts (REITs), and many mutual funds are ordinary dividends, even if you held them for years.

Mutual funds that invest in bonds or hold stocks for short periods often distribute ordinary dividends rather than may have access to ones. Your fund's annual report or the prospectus will tell you what portion of your distribution is ordinary versus may have access to. If you are unsure, your brokerage statement or the 1099-DIV will break it down for you.

How ordinary dividends affect your tax bracket

Ordinary dividends are added to your other income — wages, self-employment earnings, capital gains, and so on — to determine your total taxable income for the year. That total income determines which tax bracket you fall into. If you earn $60,000 in wages and receive $5,000 in ordinary dividends, your taxable income is $65,000, and you pay tax on the full amount at your applicable rate.

This can push you into a higher tax bracket. If you are close to the edge of a bracket, ordinary dividends might cause some of your income to be taxed at a higher rate. For example, if you are single and earn $47,150 in wages, you are in the 22% bracket. An additional $5,000 in ordinary dividends could push $1,850 of your income into the 24% bracket.

Reporting ordinary dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 showing all dividends paid during the previous year. Box 1a shows may have access to dividends, and Box 1b shows ordinary dividends. You report the ordinary dividend amount on Schedule B (if you have more than $1,500 in dividends) or directly on Form 1040. The ordinary dividend total goes into the income section of your return.

If you own mutual funds or stocks in multiple accounts, you may receive several 1099-DIVs. Add up all the ordinary dividends from all your forms and report the total. Keep copies of your 1099-DIVs with your tax records for at least three years in case the IRS asks questions.

Tax-deferred accounts shield ordinary dividends from immediate taxation

If you hold stocks or funds that pay ordinary dividends inside a 401(k), traditional IRA, or Roth IRA, you do not owe tax on those dividends in the year you receive them. The dividends stay inside the account and compound tax-free. You only pay tax when you withdraw money from a traditional 401(k) or IRA — and you never pay tax on withdrawals from a Roth IRA if you follow the rules.

This is one reason tax-advantaged accounts are valuable for holding dividend-paying investments. A stock fund that pays 3% in ordinary dividends will grow faster inside an IRA than in a regular taxable brokerage account, because the dividends are not being siphoned off to pay taxes each year.

Strategies to reduce the tax impact of ordinary dividends

If you receive substantial ordinary dividends in a taxable account, you have a few options. You can hold dividend-paying investments in tax-advantaged accounts instead, leaving your taxable account for stocks that do not pay dividends or that pay may have access to dividends. You can also choose funds or stocks that distribute less frequently or that reinvest dividends automatically, though you still owe tax on reinvested dividends.

Another approach is to harvest losses in other parts of your portfolio to offset dividend income. If you sold a stock at a loss, that loss can reduce your taxable income dollar-for-dollar, which lowers the tax you owe on ordinary dividends. This strategy, called tax-loss harvesting, works best if you have flexibility in your portfolio and can afford to hold losing positions for a time.

Frequently Asked Questions

Do I owe tax on ordinary dividends if I reinvest them?

Yes. The IRS taxes ordinary dividends in the year you receive them, whether you take the money as cash or reinvest it back into the fund. Your brokerage will report the full dividend amount on your 1099-DIV, and you report it on your tax return.

What is the difference between ordinary and may have access to dividends in terms of tax rate?

Ordinary dividends are taxed at your regular income tax rate (10% to 37%). may have access to dividends are taxed at 0%, 15%, or 20%, depending on your income. For most people, may have access to dividends are taxed at 15%, which is lower than their ordinary income rate.

Can I deduct ordinary dividend losses?

No, you cannot deduct ordinary dividends as a loss. However, if you sell a dividend-paying stock or fund at a loss, that capital loss can offset other capital gains or up to $3,000 of ordinary income per year, which indirectly reduces the tax impact of your dividends.

Are REIT dividends always ordinary dividends?

Most REIT dividends are ordinary dividends, though a portion may be classified as return of capital or capital gains depending on the REIT's structure. Your 1099-DIV will break down how much is ordinary, may have access to, or return of capital.

How do I know if my mutual fund pays ordinary or may have access to dividends?

Your brokerage statement and Form 1099-DIV will show the breakdown. You can also check the fund's prospectus or annual report, which explains the types of securities the fund holds and what kind of dividends it typically distributes.