Dividend tax depends on the type of dividend and how long you held the stock

The tax you pay on dividends falls into two categories: may have access to dividends and ordinary dividends. may have access to dividends are taxed at lower rates (0%, 15%, or 20%, depending on your income), while ordinary dividends are taxed as regular income at your marginal tax rate, which can be as high as 37%. The difference between the two hinges on how long you owned the stock before the dividend was paid.

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 that starts 60 days before the ex-dividend date. If you sell the stock too quickly or buy it shortly before the dividend payment, the dividend counts as ordinary income instead. This timing rule exists to prevent investors from gaming the tax system by holding stocks only long enough to collect a dividend payment.

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 each year. You then report these amounts on your tax return, and the IRS taxes them according to their classification.

Key Takeaways

  • may have access to dividends are taxed at 0%, 15%, or 20% depending on your total income for the year, while ordinary dividends are taxed at your regular income tax rate.
  • You must own a stock for more than 60 days within a specific 121-day window around the ex-dividend date to receive the lower may have access to dividend rate.
  • Your brokerage reports may have access to and ordinary dividends separately on Form 1099-DIV, which you use to complete your tax return.
  • Dividends from mutual funds and exchange-traded funds (ETFs) follow the same rules as individual stock dividends, though the fund itself determines which dividends pass through as may have access to.

How may have access to dividend rates work based on income

The tax rate on may have access to dividends is tied to your overall taxable income for the year, not to the amount of the dividend itself. If your taxable income falls below a certain threshold, you pay 0% tax on may have access to dividends. If it falls in the middle range, you pay 15%. If it exceeds the top threshold, you pay 20%.

For 2024, the income thresholds are: 0% rate applies to income up to $47,025 for single filers and $94,050 for married filing jointly; 15% rate applies to income between those amounts and $518,900 (single) or $583,750 (married filing jointly); 20% rate applies to income above those thresholds. These numbers change each year for inflation. The thresholds are lower for heads of household and higher for married filing separately.

This means a person earning $40,000 per year might pay 0% on may have access to dividends, while a person earning $100,000 pays 15% on the same dividend amount. The rate is not based on the dividend itself but on where your total income lands.

Ordinary dividends and how they are taxed

Ordinary dividends are taxed as regular income at your marginal tax rate. If you are in the 24% tax bracket, an ordinary dividend is taxed at 24%. If you are in the 37% bracket, it is taxed at 37%. There is no preferential rate.

Ordinary dividends come from preferred stocks, real estate investment trusts (REITs), master limited partnerships (MLPs), and certain mutual funds. They also result when you do not meet the holding period requirement for may have access to dividends. Some corporate dividends are also classified as ordinary if they do not meet the IRS definition of may have access to.

Because ordinary dividends are taxed at your full marginal rate, they can significantly increase your tax bill. A $1,000 ordinary dividend in the 37% bracket costs $370 in federal tax, while the same dividend would cost $200 in the 20% bracket if it were may have access to.

The ex-dividend date and the 60-day holding rule

The ex-dividend date is the date by which you must own the stock to receive the upcoming dividend payment. If you buy the stock on or after the ex-dividend date, you do not receive that dividend; the previous owner does. This date is set by the stock exchange and is typically one business day before the record date.

To may have access to for the lower tax rate, you must have owned the stock for more than 60 days during a 121-day period. That period starts 60 days before the ex-dividend date and ends 60 days after it. If you bought the stock 50 days before the ex-dividend date and sold it 10 days after, you held it for only 60 days total, which does not meet the "more than 60 days" requirement. The dividend would be taxed as ordinary income.

This rule prevents investors from buying a stock just before a dividend payment, collecting the dividend, and selling immediately while claiming the preferential tax rate. The IRS considers this a wash transaction and reclassifies the dividend accordingly.

Dividends from mutual funds and ETFs

When you own a mutual fund or ETF that pays dividends, the fund itself receives dividends from the stocks it holds. The fund then distributes those dividends to you. The tax treatment depends on how long the fund held each underlying stock, not how long you held the fund.

A mutual fund manager might hold a stock for years, receive a may have access to dividend, and pass that may have access to dividend through to you. Even if you bought the fund shares only last month, you receive the dividend as may have access to because the fund met the holding requirement. Conversely, a fund might hold a stock for only a short time and receive an ordinary dividend, which it passes to you as ordinary even if you have owned the fund for years.

The fund reports the breakdown of may have access to and ordinary dividends on the Form 1099-DIV it sends you. You report these amounts on your tax return exactly as the fund reports them.

State and local taxes on dividends

Federal tax is only part of the picture. Most states tax dividend income, and some tax it at a higher rate than capital gains. A few states do not tax dividends at all.

States that do not tax dividend income include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. In these states, you owe federal tax on dividends but no state income tax. In other states, dividends are taxed as ordinary income at the state level, regardless of whether they are may have access to or ordinary for federal purposes. Some states offer a preferential rate for dividends, though the rate is usually higher than the federal may have access to dividend rate.

Local taxes also apply in some cities and counties. New York City, for example, taxes dividend income as part of its local income tax. You should check your state and local tax rules to understand your full tax burden on dividends.

How to report dividends on your tax return

You report dividends on Schedule B (Interest and Ordinary Dividends) and Schedule D (Capital Gains and Losses) of Form 1040. If your ordinary dividends total more than $1,500, you must use Schedule B. If you have may have access to dividends, you report them on Schedule D even if the amount is small.

Your brokerage sends you Form 1099-DIV by January 31, showing the total ordinary dividends in Box 1a and may have access to dividends in Box 1b. You transfer these amounts to the appropriate schedules. If the brokerage made an error, you can correct it on your return by noting the discrepancy and providing the correct amount.

If you received dividends from a mutual fund or ETF, the fund sends you a Form 1099-DIV that breaks down may have access to and ordinary dividends. Some funds also send a supplemental statement showing which dividends came from which holdings, though this is for your records and not required by the IRS.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. Whether you take the dividend as cash or reinvest it in more shares, you owe tax in the year the dividend is paid. The IRS taxes the dividend based on its fair market value on the payment date, not on what you do with the money afterward. Reinvestment does not defer or eliminate the tax.

What happens if I sell a stock right after the ex-dividend date?

You still owe tax on the dividend, but the tax rate depends on how long you held the stock. If you held it for more than 60 days during the required 121-day window, the dividend is may have access to and taxed at the preferential rate. If you did not meet the holding period, it is ordinary income. Selling the stock does not change the dividend's tax classification.

Can I deduct dividend losses?

No. Dividends are taxable income, and you cannot deduct them as a loss. However, if you sell a stock at a loss, you can deduct that capital loss against capital gains or, in some cases, against ordinary income. The dividend and the capital loss are separate tax items.

Are dividends from a Roth IRA taxed?

No. Dividends earned inside a Roth IRA are not taxed, and you do not report them on your tax return. The same applies to traditional IRAs and other may have access to retirement accounts. Dividends are only taxed when they are paid outside a tax-advantaged account.

What if my brokerage reports the wrong dividend amount on Form 1099-DIV?

Contact your brokerage and ask for a corrected Form 1099-DIV (Form 1099-DIV with a "CORRECTED" label). If the brokerage does not issue a correction, you can file your tax return with the correct amount and attach a note explaining the discrepancy. Keep documentation of the correct amount in case the IRS questions your return.