Dividends are taxable income, but the tax rate depends on the type of dividend and your income level

When you receive dividends from stocks or mutual funds, you must report them as income on your tax return. The IRS taxes dividends, and the amount you owe depends on whether the dividends are may have access to or ordinary. may have access to dividends — those from U.S. companies or certain foreign companies, held for a minimum period — are taxed at lower rates (0%, 15%, or 20%, depending on your total income). Ordinary dividends are taxed at your regular income tax rate, which can be as high as 37% for high earners.

You do not pay tax when you receive the dividend. Instead, you report it when you file your tax return. Your brokerage or mutual fund company sends you a Form 1099-DIV each January showing how much you received and what type it was. You then enter this on your tax return, and the tax is calculated based on your total income for the year.

Key Takeaways

  • may have access to dividends are taxed at preferential rates (0%, 15%, or 20%), while ordinary dividends are taxed at your regular income tax bracket.
  • You must hold the stock for at least 60 days around the dividend payment date for the dividend to count as may have access to.
  • Your brokerage sends a Form 1099-DIV in January showing dividend income; you report this on your tax return, not when you receive the payment.
  • Reinvested dividends — those automatically used to buy more shares — are still taxable in the year they are paid, even though you did not receive cash.

may have access to versus ordinary dividends and their tax rates

The IRS divides dividends into two categories, and each is taxed differently. may have access to dividends receive preferential tax treatment. To may have access to, the dividend must come from a U.S. corporation or a foreign corporation whose stock trades on a U.S. exchange, and you must have owned the stock for more than 60 days during the 121-day window centered on the ex-dividend date. If these conditions are met, the dividend is taxed at 0%, 15%, or 20%, depending on your taxable income bracket for the year.

Ordinary dividends do not meet the holding period or issuer requirements. These are taxed at your ordinary income tax rate — the same rate that applies to wages, interest, and other income. For 2024, ordinary income tax rates range from 10% to 37%, depending on your filing status and total income. Most dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and certain preferred stocks are taxed as ordinary dividends.

Your brokerage will indicate on Form 1099-DIV which dividends are may have access to and which are ordinary. If you are unsure, ask your brokerage or check the fund prospectus.

How the holding period requirement works

To receive the lower tax rate on may have access to dividends, you must hold the stock for a specific period. The rule is that you must own the stock for more than 60 days during a 121-day window that starts 60 days before the ex-dividend date and ends 60 days after it. The ex-dividend date is the date set by the company; if you own the stock on or before that date, you receive the dividend.

If you buy a stock just before the ex-dividend date and sell it shortly after receiving the dividend, the dividend will not may have access to for the lower rate. Similarly, if you own the stock but it is held in a margin account and you have a short sale in the same or substantially identical stock, the holding period does not count. These rules prevent investors from collecting dividends without truly holding the investment.

The holding period is calculated separately for each dividend payment. You can own a stock long-term overall but still fail the holding period for a particular dividend if you sold it and repurchased it around the ex-dividend date.

Reporting dividends on your tax return

You report dividend income on Schedule B (Interest and Ordinary Dividends) or Schedule 1 (Additional Income), depending on the total amount and type. If your ordinary dividends exceed $1,500, you must use Schedule B. may have access to dividends are reported separately on Schedule D (Capital Gains and Losses) or Form 8949 (Sales of Capital Assets).

Your brokerage sends Form 1099-DIV by January 31 each year. This form shows the total ordinary dividends in Box 1a and may have access to dividends in Box 1b. If you received dividends from multiple sources, you will receive multiple 1099-DIVs. You must add them all together and report the total on your return. The IRS also receives a copy of your 1099-DIV, so your reported amount should match.

If you made a mistake on a prior year's return and did not report dividends correctly, you can file an amended return (Form 1040-X) to correct it. The IRS may assess penalties and interest if the error was substantial.

Reinvested dividends and tax liability

Many investors set up automatic reinvestment, where dividends are used to buy additional shares instead of being paid out in cash. This does not change your tax obligation. You still owe tax on the full dividend amount in the year it was paid, even though you never received the money. The reinvested amount becomes part of your cost basis in the stock, which affects your capital gains tax when you eventually sell.

Keep records of all reinvested dividends. When you sell the stock, you will need to know your total cost basis — the original purchase price plus all reinvested dividends. If you do not track this correctly, you may overpay capital gains tax or underpay it and face penalties.

Dividends in tax-advantaged accounts

If you hold dividend-paying stocks in a traditional IRA, Roth IRA, or 401(k), you do not pay tax on the dividends in the year they are received. In a traditional IRA or 401(k), you pay tax on the entire withdrawal amount when you take money out in retirement. In a Roth IRA, may have access to withdrawals are tax-free, including all dividends earned inside the account.

This is one reason tax-advantaged accounts are valuable for dividend investors. You can reinvest dividends and let them compound without paying annual tax. However, you must follow the rules for each account type — for example, Roth IRAs have income limits for contributions, and traditional IRAs have required minimum distributions starting at age 73.

State and local taxes on dividends

Federal tax is not the only tax on dividends. Most states tax dividend income as well, though the rate and rules vary. Some states, like Florida and Texas, do not tax dividends at all. Others tax dividends at the same rate as ordinary income. A few states offer preferential rates for may have access to dividends, similar to the federal system.

If you live in a state with income tax, check your state's rules on dividend taxation. Your state tax return will require you to report dividends separately from other income. Some states also allow deductions or credits for federal taxes paid, which can reduce your state liability.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. Reinvested dividends are still taxable in the year they are paid, even though you did not receive cash. You must report the full dividend amount on your tax return and pay tax based on your income bracket and the dividend type.

What if my dividend income is very small?

You must report all dividend income, no matter how small. However, if your total income is below the standard deduction for your filing status, you may not owe federal tax. You still file a return to claim any refundable credits you are may have access to to.

Can I deduct investment losses against dividend income?

Yes, but only up to a limit. You can deduct capital losses against capital gains and up to $3,000 of ordinary income per year. Excess losses carry forward to future years. Dividend income is ordinary income, so losses can offset it, but the $3,000 annual limit applies.

Are dividends from mutual funds taxed differently than dividends from individual stocks?

The tax treatment is the same — may have access to or ordinary, depending on the underlying holdings and your holding period. However, mutual funds may distribute capital gains in addition to dividends, and those are taxed separately. Your fund will send Form 1099-DIV showing both dividends and capital gains distributions.

What happens if I sell a stock right after receiving a dividend?

The dividend is still taxable to you in the year you received it. However, if you sell the stock shortly after buying it, the dividend may not may have access to for the lower tax rate because you did not meet the 60-day holding period requirement. The sale and the dividend are taxed separately.