How Dividends Are Taxed

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

When you receive a dividend, the IRS treats it as income and taxes it. The amount you owe depends on two things: whether the dividend is may have access to or ordinary, and your tax bracket. may have access to dividends — paid by U.S. corporations on stocks you held for at least 60 days — are taxed at lower rates, usually 0%, 15%, or 20%. Ordinary dividends are taxed as regular income at your marginal rate, which can be as high as 37%. The difference between the two can mean hundreds or thousands of dollars in taxes on the same dividend payment.

You do not pay tax when the dividend is paid. Instead, you report it on your tax return the following April. The company that paid the dividend sends you a Form 1099-DIV in January, which lists what you received and how it should be taxed. If you own the stock through a retirement account like a 401(k) or traditional IRA, you owe no tax on the dividend at all — you pay tax only when you withdraw money from the account.

Key Takeaways

• may have access to dividends are taxed at 0%, 15%, or 20% depending on your income; ordinary dividends are taxed at your full marginal rate, which can reach 37%.
• To may have access to for the lower rate, you must hold the stock for at least 60 days around the dividend payment date — buying the day before and selling the day after does not count.
• Dividends from bonds, preferred stocks, and real estate investment trusts are usually taxed as ordinary income, not at the lower may have access to rate.
• Dividends in retirement accounts (401(k), IRA, Roth IRA) are not taxed until you withdraw the money, or never taxed at all in a Roth.
• You report dividends on your tax return using the Form 1099-DIV the company sends you; you do not owe tax until April of the following year.

The difference between may have access to and ordinary dividends

A may have access to dividend is a payment from a U.S. corporation or a may have access to foreign corporation on a common or preferred stock, and you held the stock for more than 60 days during a 121-day window around the ex-dividend date. The ex-dividend date is the cutoff: if you own the stock on that date, you get the dividend. The 121-day window starts 60 days before the ex-dividend date and ends 60 days after it. If you buy the stock one day before the ex-dividend date and sell it one day after, you do not meet the holding period, and the dividend is taxed as ordinary income.

An ordinary dividend is anything that does not meet the may have access to rules. This includes dividends from bonds, dividends from real estate investment trusts (REITs), dividends from master limited partnerships (MLPs), and dividends from foreign stocks that do not may have access to under U.S. tax law. It also includes any dividend from a U.S. stock you held for 60 days or fewer. Ordinary dividends are added to your other income and taxed at your marginal rate — the rate that applies to your highest dollar of income.

The tax savings from may have access to status can be substantial. If you are in the 37% tax bracket and receive $1,000 in may have access to dividends, you owe $150 in federal tax (at the 15% may have access to rate). The same $1,000 in ordinary dividends would cost you $370. State taxes apply on top of federal taxes and vary by state.

Tax rates for may have access to dividends

may have access to dividends are taxed at one of three rates: 0%, 15%, or 20%. Your rate depends on your taxable income for the year, not on how much the dividend is. The IRS sets income thresholds each year, and they differ based on whether you file as single, married filing jointly, head of household, or another status.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025 and married filers filing jointly up to $94,050. The 15% rate applies to income above those thresholds up to $518,900 (single) or $583,750 (married filing jointly). Income above those amounts is taxed at 20%. These thresholds change each year with inflation. You can find the current year's thresholds on the IRS website or in the instructions to Form 1040.

The 0% rate does not mean you owe nothing — it means your may have access to dividends are taxed at zero percent, which is genuinely zero. This is often the best outcome for lower-income investors or retirees with modest income. If you are in the 15% bracket and receive $5,000 in may have access to dividends, you owe $750 in federal tax. If you are in the 20% bracket, you owe $1,000.

How ordinary dividends are taxed

Ordinary dividends are taxed at your marginal tax rate, which is the rate that applies to your highest dollar of income. For 2024, federal tax brackets range from 10% to 37%, depending on your income and filing status. If you are single and earn $100,000, your marginal rate is 24%. If you receive $1,000 in ordinary dividends, you owe $240 in federal tax on that amount.

Ordinary dividends are added to your other income on your tax return, which can push you into a higher bracket. If you are close to the edge of a bracket and receive a large ordinary dividend, part of it may be taxed at a higher rate than the rest. This is why the source of the dividend matters: a $5,000 dividend from a REIT might cost you more in tax than a $5,000 may have access to dividend from a stock.

Dividends in retirement accounts

If you own stocks or funds inside a traditional 401(k) or traditional IRA, dividends paid inside the account are not taxed when received. The money grows tax-free until you withdraw it. When you take a withdrawal, the entire amount — including all dividends and gains — is taxed as ordinary income at your marginal rate.

In a Roth IRA or Roth 401(k), dividends are never taxed, even when you withdraw the money. This is the main advantage of a Roth: you pay tax on the money going in, but everything that grows inside the account comes out tax-free. If you expect to be in a higher tax bracket in retirement, a Roth can save you substantial tax on dividends.

In a taxable brokerage account — the kind you open at a bank or investment firm without any special tax status — you owe tax on dividends the year they are paid, regardless of whether you sell the stock or reinvest the dividend.

State and local taxes on dividends

Federal tax is only part of the picture. Most states tax dividend income, and the rate varies widely. Some states tax dividends at the same rate as other income. Others have a separate, lower rate for dividends. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividend income at all. If you live in a state with no dividend tax and own dividend-paying stocks, you owe only federal tax.

If you live in a state that taxes dividends, the state rate is added on top of federal tax. In California, for example, dividends are taxed as ordinary income at rates up to 13.3%. In New York, the top rate is 10.9%. These rates apply to both may have access to and ordinary dividends. A few states offer a small deduction or credit for may have access to dividends, but most do not.

How to report dividends on your tax return

In January, every company that paid you dividends sends a Form 1099-DIV. This form lists the total ordinary dividends in Box 1a, may have access to dividends in Box 1b, and other types of income in other boxes. You report this information on Schedule B (Interest and Ordinary Dividends) or Schedule 1 (Additional Income), depending on the amount and type of dividend. If you have more than $1,500 in dividends, you must file Schedule B.

If you use tax software, you enter the information from the 1099-DIV, and the software calculates your tax automatically. If you file by hand or with a tax professional, they will use the form to determine whether your dividends are may have access to or ordinary and apply the correct tax rate. Keep your 1099-DIV forms for your records; you do not send them to the IRS, but you must have them if the IRS asks.

If you receive dividends from multiple sources, you may receive multiple 1099-DIV forms. Add them all together and report the total on your tax return. The IRS matches the forms you receive against what companies report, so make sure your return matches the 1099-DIV.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. Whether you take the dividend as cash or reinvest it in more shares, you owe tax on the full amount in the year it is paid. Reinvesting does not defer or avoid the tax. The only exception is dividends inside a retirement account, which are not taxed until you withdraw.

What if I sell the stock before the ex-dividend date?

If you sell before the ex-dividend date, you do not receive the dividend and owe no tax on it. The new owner receives the dividend and reports it on their tax return. The ex-dividend date is set by the stock exchange, usually one or two business days before the record date.

Can I deduct dividend losses?

No. Dividends are income, not losses. If a stock pays a dividend and then falls in value, you owe tax on the dividend but cannot deduct the loss against it. You can deduct a capital loss only when you sell the stock for less than you paid for it.

Are foreign dividends taxed differently?

Foreign dividends are usually taxed as ordinary income unless they meet specific requirements for may have access to status. Some foreign corporations may have access to, but most do not. You may also owe tax to the foreign country where the company is based, though you can claim a foreign tax credit on your U.S. return to avoid double taxation.

What happens if I do not receive a 1099-DIV?

Contact the company that paid the dividend and ask them to send it. If you do not receive it by late January, you can still report the dividend on your tax return using your own records. The IRS will match what you report against what the company reports, so make sure the amounts match.