Dividends are taxed as income, but the rate depends on whether they are may have access to or nonqualified

The tax you pay on dividends comes down to one question: did you hold the stock long enough? If you held it for more than 60 days around the dividend payment date, the dividend is may have access to and taxed at the long-term capital gains rate — which is lower than your ordinary income tax rate. If you held it for 60 days or fewer, it is nonqualified and taxed as ordinary income at your regular tax bracket.

This matters because the difference can be substantial. A may have access to dividend might be taxed at 0%, 15%, or 20% depending on your income. A nonqualified dividend is taxed at your full ordinary income rate, which could be 10%, 12%, 22%, 24%, 32%, 35%, or 37%. The IRS publishes the holding period rules and the current long-term capital gains brackets each year.

You report dividends on your tax return, and your brokerage sends you a Form 1099-DIV in January showing how much you received and how it should be classified. If you owe taxes on the dividends, you pay them when you file your return in April.

Key Takeaways

  • may have access to dividends are taxed at the long-term capital gains rate (0%, 15%, or 20%) if you held the stock for more than 60 days around the payment date.
  • Nonqualified dividends are taxed as ordinary income at your full tax bracket rate, which ranges from 10% to 37%.
  • Your brokerage reports all dividends on Form 1099-DIV, which you use to fill out your tax return.
  • Dividends in 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.

The 60-day holding period rule

To may have access to for the lower long-term capital gains rate, you must hold the stock for at least 61 days during a 121-day window centered on 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 get the payment.

The 121-day window starts 60 days before the ex-dividend date and ends 60 days after it. This rule exists to prevent traders from buying a stock just before the dividend and selling immediately after, pocketing the payment without taking on real risk. If you do not meet the 60-day test, the dividend is nonqualified.

Some stocks do not pay may have access to dividends at all. Real estate investment trusts (REITs), master limited partnerships (MLPs), and certain foreign stocks may pay dividends that are always nonqualified or taxed under special rules. Your brokerage will tell you on the 1099-DIV which dividends are may have access to and which are not.

Tax rates for may have access to dividends

may have access to dividends are taxed at the long-term capital gains rate, which is 0%, 15%, or 20% depending on your total taxable income for the year. These brackets are separate from your ordinary income brackets and are lower across the board.

For 2024, the 0% rate applies if your taxable income is below $47,025 (single) or $94,050 (married filing jointly). The 15% rate applies to income between those thresholds and $518,900 (single) or $583,750 (married filing jointly). Anything above that is taxed at 20%. These numbers change each year for inflation.

The key is that your total taxable income determines which bracket you fall into. If you have wages, interest, and dividends, you add them all together to find your rate. This is why someone with a modest salary might pay 0% on may have access to dividends, while someone with a high income pays 20%.

Tax rates for nonqualified dividends

Nonqualified dividends are taxed as ordinary income, meaning they are added to your wages, interest, and other income and taxed at your regular tax bracket. For 2024, these brackets range from 10% to 37% depending on how much you earn.

A nonqualified dividend of $1,000 is treated the same as $1,000 in wages for tax purposes. If you are in the 24% bracket, you pay $240 in tax on that dividend. If you are in the 37% bracket, you pay $370. This is why the holding period matters so much — the difference between 15% and 24% on a large dividend can be hundreds of dollars.

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 and breaks them down by type: may have access to dividends, nonqualified dividends, capital gain distributions, and other categories. You use this form to fill out Schedule B (Interest and Ordinary Dividends) or Schedule 1 (Additional Income) on your tax return.

If your total dividends are $1,500 or less and you have no other investment income, you can report them directly on your Form 1040. If you have more than $1,500 in dividends or other investment income, you must file Schedule B. If you have may have access to dividends, you also file Form 8949 and Schedule D to report the capital gains portion separately.

Most people use tax software that walks you through this process. You enter the information from your 1099-DIV, and the software calculates your tax liability and places the numbers in the right boxes on your return.

Dividends in retirement and tax-advantaged accounts

Dividends earned inside a 401(k), traditional IRA, or Roth IRA are not taxed in the year you receive them. In a traditional 401(k) or IRA, the dividends grow tax-deferred, and you pay ordinary income tax on the entire withdrawal when you take the money out in retirement. In a Roth IRA or Roth 401(k), the dividends grow tax-free, and you owe no tax on withdrawals in retirement.

This is one reason tax-advantaged accounts are valuable for dividend-paying stocks. You avoid the annual tax bill and let the money compound without being reduced by taxes each year. The trade-off is that you cannot access the money before retirement age without penalties (with some exceptions for Roth IRAs).

If you own dividend-paying stocks in a regular taxable brokerage account, you pay tax on the dividends each year. If you own the same stocks in an IRA, you pay nothing until you withdraw. This is why many investors hold dividend stocks in retirement accounts and growth stocks in taxable accounts.

State and local taxes on dividends

In addition to federal tax, most states tax dividend income. Some states tax may have access to and nonqualified dividends at the same rate as ordinary income. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividends at all. Others offer partial exemptions or lower rates for certain types of dividends.

Your state tax bill depends on where you live and where the company paying the dividend is incorporated. If you live in a high-tax state and receive substantial dividends, moving or holding dividend stocks in a retirement account can make a real difference in your after-tax return.

Frequently Asked Questions

Do I have to pay tax on dividends if I reinvest them?

Yes. Reinvesting dividends does not change the tax you owe. Whether you take the cash or buy more shares with it, the IRS treats the dividend as income in the year you receive it. You report it on your tax return and pay tax based on whether it is may have access to or nonqualified.

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

If you sell before the ex-dividend date, you do not receive the dividend at all, so there is nothing to report or pay tax on. The buyer receives the dividend instead. This is why the ex-dividend date matters — it determines who owns the stock when the payment is made.

Can I deduct dividend losses?

No. Dividends are income, not losses. However, if you sell a stock at a loss, you can deduct that capital loss against other capital gains or up to $3,000 of ordinary income per year. Unused losses carry forward to future years.

Are foreign dividends taxed differently?

Foreign dividends may be subject to withholding tax by the country where the company is based, in addition to U.S. federal tax. You may be able to claim a foreign tax credit on your return to offset the withholding. Some foreign dividends do not may have access to for the lower long-term capital gains rate and are taxed as ordinary income instead.

What happens if I do not receive a 1099-DIV?

Contact your brokerage and request a copy. You are required to report all dividends on your tax return whether or not you receive the form. If you do not receive it by early February, call the brokerage — they may resend it or provide the information another way.