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

Dividends are treated as income by the IRS, which means you owe tax on them. The amount you pay depends on whether the dividend is may have access to or ordinary. may have access to dividends — those paid by U.S. corporations or may have access to foreign corporations on stock you held for more than 60 days — are taxed at the long-term capital gains rate, which is lower than ordinary income tax rates. Ordinary dividends are taxed as regular income at your marginal tax rate.

You report dividends on your tax return whether or not the company withheld tax. If you received a dividend from a mutual fund or exchange-traded fund, the fund itself reports what portion was may have access to and what portion was ordinary, and you use those figures when you file.

Key Takeaways

  • may have access to dividends are taxed at 0%, 15%, or 20% depending on your income bracket, while ordinary dividends are taxed at your regular income tax rate.
  • To may have access to for the lower rate, you must have held the stock for more than 60 days during the 121-day window centered on the ex-dividend date.
  • Your brokerage sends you a Form 1099-DIV each January showing how much you received and how much was may have access to versus ordinary.
  • Dividends from retirement accounts like 401(k)s and traditional IRAs are not taxed until you withdraw money from the account.
  • State and local taxes on dividends vary by location; some states tax dividends as income, while others do not.

The difference between may have access to and ordinary dividends

The IRS taxes may have access to dividends at the same rates as long-term capital gains: 0%, 15%, or 20%, depending on your total taxable income for the year. For 2024, the 0% rate applies to single filers with income up to $47,025; the 15% rate applies to income between $47,025 and $518,900; and the 20% rate applies to income above that. These brackets adjust each year.

Ordinary dividends are taxed at your regular income tax bracket, which ranges from 10% to 37% depending on how much you earn. This is the same rate you pay on wages and salary. Most dividends from large U.S. corporations are may have access to, but dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and some foreign stocks are usually ordinary.

Your brokerage will tell you which dividends are may have access to and which are ordinary on your Form 1099-DIV. If you are unsure, you can also check the company's investor relations website or ask your broker directly.

How to know if a dividend qualifies for the lower rate

A dividend qualifies for the lower capital gains rate only if you meet a holding period requirement. You must have owned the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the date by which you must own the stock to receive the dividend; if you buy on or after that date, you do not receive it.

If you sold the stock before meeting the 60-day requirement, the dividend is taxed as ordinary income even if the company paid it to you. This rule prevents investors from buying stock just before a dividend payment and selling immediately after. The same holding period applies if you bought the stock on margin or used other strategies to reduce your risk of loss.

For most investors buying and holding stock for years, this requirement is automatic. It becomes relevant only if you trade frequently or buy stock specifically for the dividend.

Dividends in retirement accounts and how they are taxed differently

Dividends earned inside a traditional IRA, Roth IRA, 401(k), or other may have access to retirement account are not taxed in the year you receive them. Instead, the tax treatment depends on the account type and when you withdraw the money.

In a traditional IRA or 401(k), dividends grow tax-free, but withdrawals in retirement are taxed as ordinary income at your marginal rate. In a Roth IRA, dividends grow tax-free and may have access to withdrawals in retirement are not taxed at all. In a 529 education savings plan, dividends are tax-free if used for may have access to education expenses.

This is one reason retirement accounts are powerful: you avoid the annual tax on dividends and let the money compound without being reduced by taxes each year. You do not receive a Form 1099-DIV for dividends inside these accounts.

State and local taxes on dividends

Most states tax dividend income as part of your regular income tax. The rate varies by state and by your income level within that state. Some states, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, do not tax dividend income at all.

A few states tax dividends at a flat rate regardless of your income. New Hampshire taxes dividend and interest income at 5% (though this rate is scheduled to phase out). Vermont taxes dividends at 6% to 8.75% depending on income. Most other states apply their regular income tax brackets to dividends.

If you live in a state with no income tax but receive dividends from stocks, you owe federal tax but not state tax. If you live in a high-tax state and receive substantial dividends, state tax can add significantly to your federal bill. Check your state's tax authority website for the current rate.

How to report dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 each year. This form shows the total dividends you received in boxes 1a (ordinary dividends) and 1b (may have access to dividends). You report these amounts on Schedule B of your Form 1040 if your total dividends and interest exceed $1,500, or directly on the 1040 if they do not.

If you own mutual funds or ETFs, each fund sends its own 1099-DIV. If you own shares in multiple funds, you will receive multiple forms. Add up all the ordinary and may have access to dividends from all forms and report the totals on your return.

If you received a dividend but did not receive a 1099-DIV, contact your brokerage. If the brokerage cannot locate the form, you can still report the dividend based on your own records, but having the official form prevents IRS matching issues later.

Dividend withholding and estimated taxes

Your brokerage does not automatically withhold tax on dividends the way an employer withholds from your paycheck. You receive the full dividend amount, and you owe the tax when you file your return. If you expect to owe a large amount, you may need to make quarterly estimated tax payments to avoid penalties.

If you have a large amount of dividend income and do not pay estimated taxes, the IRS may charge you an underpayment penalty even if you pay the full amount owed when you file. You can avoid this by having your employer withhold extra tax from your paycheck, or by making four quarterly estimated payments using Form 1040-ES.

Some investors choose to reinvest dividends rather than take them in cash. Reinvested dividends are still taxable in the year you receive them, even though you did not actually receive the money.

Frequently Asked Questions

Do I owe tax on dividends if I did not sell the stock?

Yes. Dividends are taxable income in the year you receive them, regardless of whether you sold the stock or still own it. The tax is based on receiving the dividend, not on selling the shares.

What is the tax rate on dividends for 2024?

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 rate, which ranges from 10% to 37%. The exact rate depends on your total taxable income and filing status.

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

Holding longer does not reduce the tax rate on dividends you already received. However, if you hold stock for more than one year before selling it, any gain when you sell is taxed as long-term capital gains at the same favorable rates as may have access to dividends.

Are dividends from foreign stocks taxed differently?

Dividends from foreign corporations are usually taxed as ordinary income unless the corporation meets IRS requirements for may have access to status. Some foreign countries also tax dividends at the source, and you may be able to claim a foreign tax credit on your U.S. return to avoid double taxation.

Do I report reinvested dividends on my tax return?

Yes. Reinvested dividends are taxable in the year you receive them, even though the money was automatically used to buy more shares. Your brokerage reports reinvested dividends on your 1099-DIV the same way it reports dividends you took in cash.