Ordinary dividends are taxed at your regular income tax rate, not at the lower capital gains rate

When you receive an ordinary dividend from a stock or mutual fund, the IRS treats it as ordinary income. That means it gets added to your wages, interest, and other income, and you pay tax on it at whatever rate applies to your total income for the year. If you are in the 22% tax bracket, ordinary dividends are taxed at 22%. If you are in the 37% bracket, they are taxed at 37%.

This is different from may have access to dividends, which receive preferential tax treatment and are taxed at the lower capital gains rates (0%, 15%, or 20%, depending on your income). The difference matters significantly: a $1,000 ordinary dividend could cost you $220 in taxes if you are in the 22% bracket, while a $1,000 may have access to dividend in the same bracket would cost only $150.

The IRS does not automatically know which dividends are ordinary and which are may have access to. Your brokerage or fund company reports this distinction on Form 1099-DIV, which you receive by January 31 each year. You then report the amounts on your tax return in the correct sections.

Key Takeaways

  • Ordinary dividends are taxed at your marginal income tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • Your brokerage reports ordinary dividends on Form 1099-DIV, Box 1a, and you report this amount on your tax return as ordinary income.
  • may have access to dividends receive lower tax rates (0%, 15%, or 20%) and are reported separately on Form 1099-DIV in Box 1b.
  • You owe tax on ordinary dividends in the year you receive them, even if you reinvest the money back into the same stock or fund.

Which dividends count as ordinary

Most dividends from stocks and mutual funds are ordinary unless they meet specific IRS requirements to be may have access to. The main rule: a dividend is ordinary if the company paying it did not meet the IRS definition of a domestic corporation or a may have access to foreign corporation, or if you did not hold the stock long enough.

Dividends from real estate investment trusts (REITs) are almost always ordinary. Dividends from master limited partnerships (MLPs) are ordinary. Dividends paid by money market funds are ordinary. Dividends from most foreign stocks are ordinary unless the stock is traded on a U.S. exchange and meets other conditions.

Even if a company is a regular U.S. corporation, you must have owned the stock for at least 60 days during a 121-day window centered on the ex-dividend date for the dividend to be may have access to. If you bought the stock two weeks before the dividend and sold it two weeks after, the dividend is ordinary, not may have access to.

How ordinary dividends affect your tax bracket

Ordinary dividends stack on top of your other income. If you earned $50,000 in wages and received $5,000 in ordinary dividends, your taxable income is $55,000. You then apply the tax brackets for your filing status to that $55,000 total.

This means ordinary dividends can push you into a higher tax bracket. If you are single and your wages put you at $44,725 (the top of the 22% bracket in 2023), an additional $5,000 in ordinary dividends moves $4,275 of that dividend into the 24% bracket. You do not pay 24% on all $5,000, only on the portion that exceeds the bracket threshold.

Ordinary dividends also affect whether you owe the Net Investment Income Tax (NIIT), a 3.8% additional tax on investment income if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Ordinary dividends count toward this threshold.

Reporting ordinary dividends on your tax return

Your brokerage sends you Form 1099-DIV by January 31. Box 1a shows ordinary dividends. You report this amount on Schedule B (Interest and Ordinary Dividends) if your ordinary dividends exceed $1,500, or directly on Form 1040 if they are $1,500 or less. The amount then goes into the "ordinary dividends" line on your Form 1040.

If you own mutual funds or stocks through multiple brokerages, you will receive multiple 1099-DIVs. Add up all the Box 1a amounts from all your forms and report the total on your return. The IRS receives copies of all your 1099-DIVs, so the total must match what you report.

If your brokerage made an error on the 1099-DIV—for example, reporting a may have access to dividend as ordinary—you can still report it correctly on your return. Attach a statement explaining the correction. However, if the error is small, it is often simpler to report what the form says and let the IRS match it to your 1099-DIV without discrepancy.

Ordinary dividends and estimated taxes

If you expect to owe $1,000 or more in taxes for the year after accounting for withholding, you may need to make quarterly estimated tax payments. Ordinary dividends count toward this calculation. If you receive a large dividend in one quarter and do not adjust your withholding or estimated payments, you could owe a penalty when you file.

You can avoid estimated tax payments by increasing the withholding on your paycheck. If you work and your employer withholds income tax, you can file a new Form W-4 to claim fewer allowances, which increases withholding and can cover the tax on your dividends.

Ordinary dividends in retirement accounts

If you own stocks or mutual funds inside a traditional IRA, Roth IRA, or 401(k), you do not pay tax on ordinary dividends in the year you receive them. The dividends sit inside the account tax-free. When you withdraw money from a traditional IRA or 401(k), you pay tax on the entire withdrawal at your ordinary income rate, regardless of whether it came from dividends, capital gains, or the original contribution. Roth withdrawals are tax-free if you meet the rules.

This is one reason retirement accounts are valuable: they shelter ordinary dividends from annual taxation. You can reinvest dividends inside the account without triggering a tax bill each year.

State and local taxes on ordinary dividends

Most states tax ordinary dividends as ordinary income at the state level as well. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not have a state income tax at all. New Hampshire and Tennessee tax only dividends and interest, not wages.

If you live in a state with income tax, ordinary dividends are usually taxed at your state rate in addition to the federal rate. Some states offer small deductions or credits for dividend income, but these are rare and usually phase out at higher incomes. Check your state's tax website or a tax professional for your specific situation.

Frequently Asked Questions

Do I owe tax on ordinary dividends if I reinvest them?

Yes. The IRS taxes you on ordinary dividends in the year you receive them, regardless of whether you take the cash or reinvest it back into the same stock or fund. Reinvestment does not defer or eliminate the tax.

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

Ordinary dividends are taxed at your regular income tax rate (10% to 37%). may have access to dividends are taxed at the lower capital gains rates (0%, 15%, or 20%). may have access to dividends come from U.S. or certain foreign corporations and require you to hold the stock for at least 60 days around the ex-dividend date. Most dividends from REITs, MLPs, and money market funds are ordinary.

Can I deduct ordinary dividend losses?

No. Ordinary dividends are income, not deductible expenses. However, if you sell a stock at a loss, you can deduct the capital loss (up to $3,000 per year against ordinary income, with excess losses carried forward). The loss on the sale is separate from the tax on dividends you received while holding the stock.

What if my brokerage reported a dividend incorrectly on Form 1099-DIV?

Contact your brokerage and ask them to issue a corrected 1099-DIV (Form 1099-DIV with an "X" in the "Corrected" box). If they do not correct it, you can still report the dividend correctly on your return and attach a statement explaining the discrepancy. The IRS will match your return to the original 1099-DIV, so a note prevents a mismatch notice.

Do ordinary dividends count toward the Net Investment Income Tax?

Yes. Ordinary dividends are investment income and count toward the 3.8% Net Investment Income Tax threshold. If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you may owe this additional tax on your ordinary dividends.