Dividends are taxed differently depending on the type, and the rate is usually lower than your regular income tax rate

Not all dividends are taxed the same way. The IRS sorts them into two categories: may have access to dividends and ordinary dividends. may have access to dividends get the preferential capital gains tax rate, which is lower. Ordinary dividends are taxed at your regular income tax bracket, the same rate as wages or salary.

The difference matters. A may have access to dividend might be taxed at 15% or 20%, depending on your income. That same dollar as an ordinary dividend could be taxed at 10%, 22%, 24%, or higher, depending on your tax bracket. Over time, this adds up.

Which category your dividend falls into depends on the type of investment and how long you held it. The IRS has specific rules for each, and they are not always obvious from your brokerage statement.

Key Takeaways

  • may have access to dividends are taxed at the capital gains rate (0%, 15%, or 20%), which is lower than ordinary income tax rates.
  • Ordinary dividends are taxed at your regular income tax bracket, the same as wages.
  • To may have access to for the lower rate, you must hold the stock for at least 60 days around the dividend payment date.
  • Your brokerage will report which dividends are may have access to and which are ordinary on Form 1099-DIV, which you receive by January 31.

What makes a dividend "may have access to" for the lower tax rate

A dividend is may have access to if it comes from a U.S. corporation or a may have access to foreign corporation, and you meet a holding period requirement. The holding period is the key: you must own the stock for at least 60 days during a 121-day window that starts 60 days before the ex-dividend date.

The ex-dividend date is the cutoff. If you buy the stock on or after that date, you do not receive the dividend at all. If you buy before it and hold through the ex-dividend date, the 60-day clock starts. You need to keep the stock for 60 of the next 121 days to may have access to for the lower tax rate.

This rule exists to prevent people from buying stock just before a dividend payment and selling immediately after. If you hold for only a few days, the dividend is ordinary, not may have access to, even if the company is a U.S. corporation.

Ordinary dividends and when they apply

Ordinary dividends are taxed as regular income. They come from several sources: preferred stock dividends, dividends from real estate investment trusts (REITs), dividends from master limited partnerships (MLPs), and dividends from stocks you did not hold long enough to may have access to.

REITs and MLPs are common sources of ordinary dividends. These investments are structured differently from regular stocks, and the IRS treats their distributions as ordinary income by default. If you own a REIT or MLP, expect most or all of your distributions to be taxed at your regular rate, not the capital gains rate.

Mutual funds and exchange-traded funds (ETFs) can pay both may have access to and ordinary dividends. The fund itself receives dividends from the stocks it holds, and passes them through to you. Your fund's annual statement will break down how much of each type you received.

The three capital gains tax rates and which one applies to you

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 brackets change each year and 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 brackets are adjusted each year for inflation, so the numbers change. The IRS publishes updated brackets in the fall for the following year. Your brokerage or tax software will use the correct year's brackets when you file.

How your brokerage reports dividends to the IRS

Your brokerage sends you a Form 1099-DIV by January 31 of the year after you received the dividends. This form lists all dividends paid to you during the year and sorts them into boxes: may have access to dividends in one box, ordinary dividends in another, capital gain distributions in a third.

You use the numbers from this form when you file your tax return. If you use tax software, you can enter the form directly, and the software will calculate your tax. If you file by hand or with a tax preparer, you will need the form in front of you.

The brokerage determines whether a dividend is may have access to or ordinary based on the holding period rule and the type of investment. If you held the stock long enough and it qualifies, the brokerage reports it as may have access to. If not, it reports it as ordinary. You do not have to calculate this yourself.

What happens if you do not meet the holding period

If you buy a stock, receive a dividend, and sell within 60 days, the dividend becomes ordinary income. The brokerage will report it that way on your 1099-DIV. You pay tax at your regular rate instead of the capital gains rate.

This can happen by accident. You might buy a dividend stock, intend to hold it, and then sell for an unrelated reason. The dividend you received is still ordinary. There is no way to reclassify it after the fact.

Some investors use this rule intentionally. If you are in the 0% capital gains bracket, you might prefer to receive ordinary dividends because they do not push you into a higher bracket as quickly. Tax planning around this is complex and depends on your full income picture for the year.

Dividends from foreign stocks and funds

Dividends from foreign corporations are usually taxed as ordinary income, even if you held the stock for years. The may have access to dividend rate applies only to dividends from U.S. corporations and a limited list of may have access to foreign corporations.

may have access to foreign corporations include those in countries with tax treaties with the United States and some others. Your brokerage will report whether a foreign dividend qualifies. If the country is not on the IRS list, the dividend is ordinary.

International funds and ETFs may hold stocks from many countries. Your fund statement will show which dividends are may have access to and which are ordinary based on where each stock is incorporated.

Frequently Asked Questions

Do I have to pay 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 it in the year you receive it. Reinvestment does not defer the tax. You report the full dividend amount on your tax return and pay tax based on whether it is may have access to or ordinary.

What if I inherited stock and received a dividend?

Dividends on inherited stock are ordinary income, not may have access to, regardless of how long the previous owner held it. The holding period does not carry over to you. You must hold the stock for 60 days yourself to get the may have access to rate on future dividends.

Are stock splits or dividend reinvestment plans taxed differently?

Stock splits are not taxable events. Dividend reinvestment plans (DRIPs) are taxed the same way as regular dividends: may have access to or ordinary based on the holding period and the type of investment. The fact that you reinvested does not change the tax treatment.

Can I deduct investment losses against dividend income?

Yes, but only up to a limit. You can deduct capital losses against capital gains first, then up to $3,000 of ordinary income per year. Losses beyond that carry forward to future years. This is separate from the dividend tax rate, but it can reduce your overall tax bill.

What if my brokerage reports a dividend as ordinary but I think it should be may have access to?

Contact your brokerage and ask them to review the holding period. If you held the stock for 60 days in the required window and it is from a U.S. or may have access to foreign corporation, they may have made an error. They can issue a corrected 1099-DIV if needed. Keep your trade confirmations to prove the dates you bought and sold.