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

Dividends are taxed as income by the IRS. The tax you pay depends on whether the dividend is may have access to or ordinary. may have access to dividends — paid by U.S. corporations or may have access to foreign companies on stock you held for more than 60 days — are taxed at lower long-term capital gains rates: 0%, 15%, or 20% depending on your income bracket. Ordinary dividends are taxed at your regular income tax rate, which can be as high as 37% federally. You report dividends on your tax return each year, and your brokerage sends you a Form 1099-DIV showing what you received.

State and local taxes may also apply to dividends, depending on where you live. Some states tax dividends as regular income; others do not tax investment income at all. You are responsible for reporting dividends even if your brokerage does not send a 1099-DIV — for instance, if you received less than $10 in dividends, the brokerage may not issue one, but the IRS still expects you to report it.

Key Takeaways

  • 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 up to 37%.
  • A dividend is may have access to only if you held the stock for more than 60 days around the ex-dividend date and the company meets IRS requirements.
  • Your brokerage reports dividends to the IRS on Form 1099-DIV, which you receive by January 31 and must include on your tax return.
  • State and local taxes on dividends vary widely — some states tax them as income, others do not tax them at all.
  • If you reinvest dividends automatically, you still owe tax on them in the year they are paid, not when you eventually sell the shares.

How may have access to and ordinary dividends are taxed differently

The IRS sorts dividends into two categories, and the difference in tax rates is substantial. may have access to dividends receive preferential treatment: they are taxed at the long-term capital gains rate that applies to your income bracket. For 2024, those rates are 0% (if your income is below roughly $47,000 for single filers), 15% (income between roughly $47,000 and $518,000), or 20% (income above roughly $518,000). These thresholds change yearly and vary by filing status.

Ordinary dividends — which include dividends from real estate investment trusts (REITs), most bond funds, and preferred stock — are taxed as regular income at your marginal tax rate. If you are in the 24% federal bracket, ordinary dividends are taxed at 24%. If you are in the 37% bracket, they are taxed at 37%. This is a significant difference from may have access to dividends, especially for higher earners.

To may have access to for the lower rate, you must meet two conditions: the company paying the dividend must be a U.S. corporation or a may have access to foreign corporation, and you must have held the stock for more than 60 days during the 121-day window centered on the ex-dividend date. If you sell the stock too quickly or hold it through a period when you received a large payment that reduced the risk of loss, the IRS may reclassify the dividend as ordinary.

What Form 1099-DIV tells you and when you receive it

Your brokerage is required to send you a Form 1099-DIV by January 31 each year if you received $10 or more in dividends during the prior year. This form breaks down your dividends into categories: ordinary dividends, may have access to dividends, capital gain distributions, and other types. The brokerage also sends a copy to the IRS, so the IRS knows what you received.

The form lists dividends by the date they were paid to you, not the date you reinvested them or sold the stock. This matters because you owe tax in the year the dividend was paid, regardless of what you do with the money afterward. If you received a dividend in December 2024, you report it on your 2024 tax return due in April 2025, even if you did not touch the money until 2025.

If you received less than $10 in dividends, your brokerage may not issue a 1099-DIV, but you are still required to report the income on your tax return. Check your brokerage account statements to find all dividends paid during the year. If you hold stocks through multiple brokerages, you will receive a separate 1099-DIV from each one.

How reinvested dividends affect your tax bill

Many investors set their brokerage accounts to automatically reinvest dividends — the cash is used to buy more shares instead of sitting in a cash account. This does not change when you owe tax. You owe tax on the dividend in the year it was paid, whether you took the cash or reinvested it. The IRS considers reinvested dividends to be income received in that year.

Reinvested dividends do affect your cost basis — the amount you paid for your shares. When you reinvest a $100 dividend to buy more shares, your cost basis increases by $100. This matters when you eventually sell the stock, because a higher cost basis means a smaller capital gain (or larger loss) and therefore less tax owed on the sale. Keep records of all reinvested dividends so you can calculate your cost basis accurately when you sell.

State and local taxes on dividends vary significantly

Federal tax is only part of the picture. Most states tax dividends as ordinary income, meaning they are subject to your state income tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax investment income at all, so residents of those states owe no state tax on dividends. Other states have special rates or exemptions for certain types of dividends.

If you live in a state with a high income tax rate and receive substantial dividends, state tax can add significantly to your bill. For example, California taxes dividends as regular income at rates up to 13.3%. New York taxes them at rates up to 10.9%. If you moved during the year or work in a state different from where you live, you may owe tax to multiple states on the same dividend.

Local taxes on dividends are less common but do exist in some cities and counties. Check your state tax authority's website or speak with a tax professional to understand what you owe in your specific location.

How to report dividends on your tax return

You report dividends on Schedule B (Interest and Ordinary Dividends) if you received more than $1,500 in ordinary dividends, or on Schedule 1 (Additional Income) if you received $1,500 or less. may have access to dividends go on Schedule D (Capital Gains and Losses) or Form 8949 (Sales of Capital Assets), depending on the amount and complexity of your situation.

Most tax software — including TurboTax, H&R Block, and TaxAct — will import your 1099-DIV information directly from your brokerage if you link your account. The software then places the dividends in the correct schedules automatically. If you file by hand or use a tax professional, bring your 1099-DIV forms and any records of dividends your brokerage did not report (those under $10).

If you received dividends from a mutual fund or ETF, the fund will send you a Form 1099-DIV showing how much of the distribution was ordinary dividends and how much was may have access to. Some funds also pay capital gain distributions, which are taxed differently and are reported separately on the form.

Strategies to reduce taxes on dividends

If you hold dividend-paying stocks in a tax-advantaged account — such as a 401(k), traditional IRA, or Roth IRA — you owe no tax on the dividends in that account. The dividends grow tax-free (or tax-deferred, depending on the account type) until you withdraw the money. This is one reason financial advisors often recommend holding dividend stocks in retirement accounts rather than taxable brokerage accounts.

In a taxable account, you can reduce your tax bill by holding dividend stocks long enough to may have access to for the lower long-term capital gains rate. If you are close to the 60-day holding period, waiting a few weeks before selling can save you money. You can also harvest tax losses — selling losing positions to offset gains from dividends or other investments — though this strategy requires careful timing to avoid wash-sale rules.

Some investors use dividend-focused strategies like buying dividend aristocrats (companies with a long history of raising dividends) or dividend growth stocks, which tend to have lower yields and therefore lower tax bills than high-yield stocks. However, tax efficiency should not be your only consideration when choosing investments; focus first on building a diversified portfolio that matches your goals and risk tolerance.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. You owe tax on dividends in the year they are paid, whether you take the cash or reinvest it. The IRS treats reinvested dividends as income received. However, reinvested dividends increase your cost basis, which reduces your taxable gain when you eventually sell the shares.

What is the difference between a may have access to and ordinary dividend?

may have access to dividends are taxed at the long-term capital gains rate (0%, 15%, or 20%), while ordinary dividends are taxed at your regular income tax rate (up to 37%). To be may have access to, you must hold the stock for more than 60 days around the ex-dividend date, and the company must meet IRS requirements. Most dividends from U.S. stocks are may have access to; dividends from REITs and bond funds are usually ordinary.

How do I know if my dividend is may have access to or ordinary?

Your Form 1099-DIV breaks down dividends into may have access to and ordinary categories. Your brokerage also typically labels dividends in your account statements. If you are unsure, contact your brokerage or check the company's investor relations website — they can tell you whether the dividend qualifies for preferential tax treatment.

Can I avoid paying tax on dividends?

You cannot avoid federal tax on dividends in a taxable account, but you can defer it by holding dividend stocks in a 401(k), traditional IRA, or Roth IRA. You can also reduce your tax bill by holding stocks long enough to may have access to for the lower long-term capital gains rate and by using tax-loss harvesting to offset gains.

Do I owe tax on dividends if I received less than $10?

Yes. Your brokerage may not send a 1099-DIV for dividends under $10, but you are still required to report the income on your tax return. Check your brokerage statements to find all dividends paid during the year, and include them when you file.