Yes, you owe tax on most dividends, but the rate depends on the type of dividend and how long you held the stock

The IRS treats dividends as income, so you report them on your tax return and pay tax on them. However, you do not pay the same rate on all dividends. may have access to dividends — which come from stocks you held for at least 60 days around the payment date — are taxed at the long-term capital gains rate, which is lower than your ordinary income tax rate. Non-may have access to dividends are taxed as ordinary income at your regular tax bracket rate.

The difference matters. If you are in the 22% tax bracket, a non-may have access to dividend is taxed at 22%. The same dividend, if may have access to, might be taxed at 15% or even 0%, depending on your total income. Over time, this difference adds up.

You also do not owe tax on dividends you reinvest through a dividend reinvestment plan (DRIP). You still report the income on your tax return, but you are not sending cash to the IRS that year — the dividend buys more shares instead.

Key Takeaways

  • may have access to dividends are taxed at the long-term capital gains rate (0%, 15%, or 20%), while non-may have access to dividends are taxed as ordinary income at your regular bracket rate.
  • To may have access to for the lower rate, you must hold the stock for at least 60 days during the 121-day window centered on the ex-dividend date.
  • Dividends from tax-advantaged accounts like 401(k)s and IRAs are not taxed until you withdraw the money, or not at all in a Roth account.
  • You report dividend income on Schedule B (Form 1040) and pay tax on it even if the dividend was reinvested into more shares.

How the IRS defines may have access to versus non-may have access to dividends

The IRS created the may have access to dividend category in 2003 to encourage long-term stock ownership. A dividend is may have access to if you held the underlying stock for more than 60 days during a 121-day period 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 upcoming dividend payment.

Non-may have access to dividends come from stocks you held for 60 days or fewer, or from certain sources like real estate investment trusts (REITs) and master limited partnerships (MLPs). Preferred stock dividends can also be non-may have access to if you did not meet the holding period. Your brokerage statement usually labels dividends as may have access to or non-may have access to, so you do not have to calculate this yourself.

The holding period rule exists to prevent traders from buying a stock just before the dividend payment and selling immediately after. If you do that, the IRS does not consider the dividend may have access to, even if you technically owned the shares on the ex-dividend date.

Tax rates for may have access to dividends in 2024

may have access to dividends are taxed at the long-term capital gains rate, which has three brackets: 0%, 15%, or 20%. Your rate depends on your total taxable income for the year, not on how much dividend income you received.

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 adjust slightly each year for inflation.

This is why may have access to dividends matter: if you are in the 22% or 24% ordinary income bracket but your total income still falls in the 15% capital gains bracket, your dividends are taxed at 15% instead of 22% or 24%. The savings compound if you receive dividends year after year.

Non-may have access to dividends and your ordinary tax rate

Non-may have access to dividends are added to your other income and taxed at your marginal tax rate — the rate for your highest bracket. If you earn $75,000 in wages and receive $5,000 in non-may have access to dividends, the $5,000 is taxed at whatever bracket $80,000 puts you in.

For 2024, the ordinary income tax brackets range from 10% to 37%, depending on filing status and income level. Non-may have access to dividends do not get the preferential capital gains treatment, so they are taxed as if they were wages or other ordinary income.

REITs and MLPs almost always pay non-may have access to dividends, even if you held them for years. If you own these investments, expect to pay ordinary income tax rates on the distributions, not capital gains rates.

Dividends in retirement accounts and tax-advantaged plans

Dividends earned inside a 401(k), traditional IRA, or Roth IRA are not taxed in the year you receive them. The account itself is tax-sheltered, so dividends can accumulate and compound without triggering an annual tax bill.

In a traditional 401(k) or IRA, you pay tax on the dividends when you withdraw the money in retirement. In a Roth IRA or Roth 401(k), you do not pay tax on the dividends at all — neither when you receive them nor when you withdraw them, as long as you follow the withdrawal rules.

This is one reason retirement accounts are powerful: dividends can reinvest and grow for decades without being reduced by annual taxes. By the time you withdraw, you have far more money than if you had held the same stocks in a taxable account.

How to report dividends on your tax return

You report dividend income on Schedule B (Form 1040) if your total dividends and interest exceed $1,500. If they are $1,500 or less, you can report them directly on Form 1040 without filing Schedule B. Your brokerage sends you a Form 1099-DIV in January showing all dividends paid during the previous year, broken down by may have access to and non-may have access to.

You must report the full dividend amount even if it was automatically reinvested into more shares. The IRS considers reinvested dividends as income in the year they were paid, not when you eventually sell the shares. This means you owe tax on dividends you never actually received as cash.

When you eventually sell the shares purchased with reinvested dividends, your cost basis includes the reinvested amount. This prevents you from paying tax twice — once on the dividend and again on the gain when you sell.

State and local taxes on dividends

Most states tax dividend income as ordinary income at their state tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividends at all. New Hampshire taxes only dividend and interest income, not wages.

Some states offer preferential rates for long-term capital gains, similar to the federal system, but the rules vary. If you live in a state with income tax, check your state's rules on how dividends are taxed, because the state tax can be significant.

Local taxes on dividends are rare but possible in some cities and counties. Your tax software or a tax professional can tell you whether your locality taxes dividend income.

Strategies to reduce dividend taxes

Hold stocks long enough to may have access to for the lower capital gains rate. If you plan to sell a stock soon after buying it, the dividend is likely to be non-may have access to anyway, so the tax difference may not matter. But if you hold for the long term, may have access to for the 15% or 0% rate instead of your ordinary bracket rate saves real money.

Use tax-advantaged accounts for dividend-heavy investments. If you own dividend stocks or funds that pay high distributions, holding them in an IRA or 401(k) shields the dividends from annual taxation. Bonds and REITs, which pay non-may have access to dividends, are especially good candidates for retirement accounts.

Keep records of your cost basis and holding periods. When you sell shares, you can choose which shares to sell — selling the ones with the longest holding period first can help you may have access to for capital gains treatment on the sale itself, not just the dividend.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. The IRS taxes dividends in the year they are paid, regardless of whether you receive them as cash or reinvest them into more shares. You report the full dividend amount on your tax return and pay tax on it, even though no cash left your account.

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

You do not receive the dividend and do not owe tax on it. The person who owned the stock on the ex-dividend date receives the dividend and owes the tax. If you sold after the ex-dividend date but before the payment date, you still owe tax because you owned it on the date that matters.

Are dividends from mutual funds taxed differently?

Mutual funds distribute both may have access to and non-may have access to dividends. The fund's prospectus or annual report tells you the breakdown. You owe tax on both types, at their respective rates. Some funds focus on may have access to dividends, which can reduce your tax bill compared to funds that distribute mostly non-may have access to dividends.

Do I owe tax on stock dividends or only cash dividends?

You owe tax on both. A stock dividend — where the company issues new shares instead of cash — is still taxable income. The IRS values it at the fair market value of the shares on the distribution date, and you report that amount as income.

What happens if I do not report dividend income?

The IRS receives a copy of your Form 1099-DIV from your brokerage, so they know what dividends you were paid. Failing to report them can trigger an audit, penalties, and interest on the unpaid tax. It is always safer to report all dividend income, even if the amount is small.