How Qualified Dividends Get Taxed at Lower Rates Than Ordinary Income

may have access to dividends are taxed at lower rates than the ordinary income tax rates you pay on wages

A may have access to dividend is a payment from a corporation that meets specific holding and timing rules set by the IRS. If your dividends may have access to, the IRS taxes them at the long-term capital gains rate — which is 0%, 15%, or 20% depending on your total income — rather than at your regular income tax bracket, which can be as high as 37%. This is a significant difference. A dividend that would cost you $370 in taxes at the 37% bracket costs only $74 at the 20% capital gains rate.

Not all dividends may have access to. Dividends from money market funds, bonds, and certain preferred stocks do not may have access to. Dividends from most common stocks do may have access to if you meet two requirements: you must have owned the stock for more than 60 days during a specific 121-day window around the payment date, and the company paying the dividend must be a U.S. corporation or a foreign corporation whose stock trades on a U.S. exchange.

Key Takeaways

may have access to dividends are taxed at 0%, 15%, or 20% based on your income level, while ordinary dividends use your regular tax bracket rate.
You must own the stock for more than 60 days within 121 days before and after the ex-dividend date for the dividend to may have access to.
Your brokerage statement will identify which dividends are may have access to and which are ordinary, so you do not have to track holding periods yourself.
If you sell a stock shortly after buying it to capture the dividend, the short holding period disqualifies that dividend from the lower tax rate.

The three capital gains tax rates for may have access to dividends

The IRS uses the same tax brackets for may have access to dividends as it uses for long-term capital gains. For 2024, the rates are 0%, 15%, and 20%. Which rate you pay depends on your taxable income, not on how much the dividend itself is worth.

The 0% bracket applies if your taxable income falls below a threshold that changes each year. For 2024, single filers reach the 0% bracket if their taxable income is under $47,025; married filing jointly filers if under $94,050. The 15% bracket covers income above those thresholds up to higher limits (roughly $518,900 for single filers in 2024). Anything above that is taxed at 20%. These thresholds adjust annually for inflation.

Your brokerage or mutual fund company will report may have access to dividends separately from ordinary dividends on your tax forms. When you file, you enter may have access to dividends on Schedule D (Capital Gains and Losses) rather than on the ordinary income section of your return. This routing to the capital gains calculation is what triggers the lower rate.

What the 60-day holding requirement actually means

To may have access to for the lower tax rate, you must own the stock for more than 60 days during a 121-day period. The 121-day window runs from 60 days before the ex-dividend date to 60 days after it. The ex-dividend date is the cutoff: if you buy the stock on or after the ex-dividend date, you do not receive that dividend at all.

The holding period is measured in calendar days, and the 60 days do not have to be consecutive. If you own the stock for 45 days, sell it, then buy it back and own it for 20 more days within the 121-day window, you have only 65 days of ownership — which qualifies. But if you own it for 50 days and sell it, you have not met the 60-day threshold, and the dividend becomes ordinary income.

Your brokerage tracks this automatically. When you receive a dividend, the company reports it to the IRS and to you with a designation of "may have access to" or "ordinary." You do not need to calculate the holding period yourself or prove it on your tax return. If your brokerage made an error, you can correct it when you file, but in practice these designations are reliable.

Dividends that never may have access to, no matter how long you hold

Some dividends are ordinary income by definition. Dividends from bonds, Treasury securities, and money market funds are always taxed as ordinary income. Dividends from real estate investment trusts (REITs) are also ordinary income, though some REIT distributions may be treated as return of capital or capital gains depending on the fund's structure.

Preferred stock dividends may have access to only if the preferred stock meets the same holding-period test as common stock and is issued by a may have access to corporation. Many preferred stocks do may have access to, but some do not — your brokerage statement will tell you which.

Dividends paid by foreign corporations generally do not may have access to unless the corporation's stock is traded on a U.S. exchange and the dividend is paid in U.S. dollars. If you own shares in a foreign company through an American depositary receipt (ADR), the dividend may may have access to if the ADR itself trades on a U.S. exchange.

How selling a stock shortly after buying it affects the tax rate

If you buy a stock specifically to capture an upcoming dividend and then sell it shortly after, the dividend becomes ordinary income. This is a common tax trap. You receive the dividend, feel like you have made money, but then discover at tax time that you paid a higher rate because you did not hold the stock long enough.

The IRS does not require you to prove intent — you do not have to show that you bought the stock "for the dividend." The rule is purely mechanical: if you do not hold for more than 60 days in the 121-day window, the dividend is ordinary. Many investors discover this when their brokerage reports the dividend as ordinary on the year-end tax form.

This matters most when dividend yields are high or when you are in a high tax bracket. A 5% dividend yield on a $10,000 investment ($500) taxed at 37% costs $185 in taxes. The same dividend taxed at 20% costs $100. If the stock price drops 3% while you hold it, you lose $300 on the sale — which wipes out the tax savings and then some.

State and local taxes on may have access to dividends

may have access to dividends receive preferential treatment at the federal level, but most states tax them as ordinary income. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no income tax at all. Most others tax dividends at the same rate as wages, regardless of whether they are may have access to or ordinary.

A handful of states offer some preferential treatment for dividends. Illinois, for example, exempts dividend income from state tax entirely. Louisiana offers a deduction for may have access to dividends. But these are exceptions. In most states, a may have access to dividend that saves you 17 percentage points in federal tax will still be taxed at your full state rate.

How to report may have access to dividends on your tax return

Your brokerage or mutual fund company sends you a Form 1099-DIV in January showing all dividends paid during the previous year. This form separates may have access to dividends from ordinary dividends in different boxes. You do not need to do anything with the holding-period calculation — the company has already determined which dividends may have access to.

When you file your return, you enter may have access to dividends on Schedule D (Form 1040), which is the form for capital gains and losses. Ordinary dividends go on Form 1040 itself, in the ordinary income section. Tax software will route them to the correct place automatically if you enter them correctly.

If your brokerage incorrectly reported a dividend as ordinary when it should have been may have access to (or vice versa), you can correct it on your return. You would attach a statement explaining the correction and recalculate your tax. In practice, errors are rare, but if you believe one has occurred, keep your brokerage statements and the ex-dividend dates as proof.

Frequently Asked Questions

Can I get the may have access to dividend rate if I inherited the stock?

No. The holding period resets when you inherit stock. You must hold the inherited stock for more than 60 days in the 121-day window around the ex-dividend date for that dividend to may have access to. However, inherited stock receives a "step-up" in basis to its value on the date of death, which can eliminate or reduce capital gains tax when you eventually sell.

What happens if I own the stock through a 401(k) or IRA?

Dividends inside a 401(k) or traditional IRA are not taxed at all when received — they are reinvested tax-free. When you withdraw money from the account in retirement, the entire withdrawal is taxed as ordinary income, regardless of whether it came from dividends or capital gains. Roth IRAs work the same way for dividends, but may have access to withdrawals are tax-free.

Do I have to pay estimated taxes on may have access to dividends?

If your dividend income is large enough that you expect to owe more than $1,000 in taxes for the year, you may need to pay estimated taxes quarterly. The IRS uses a safe-harbor rule: if you pay 90% of your current year's tax or 100% of your prior year's tax (110% if your prior year income was over $150,000), you avoid penalties. Your tax software or accountant can calculate whether you need to pay.

If I lose money on a stock, does the dividend still count as may have access to?

Yes. The may have access to dividend status depends only on the holding period and the type of stock, not on whether the stock price went up or down. You can have a may have access to dividend and a capital loss on the same stock in the same year. The dividend is taxed at the capital gains rate, and the loss offsets other gains or up to $3,000 of ordinary income.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.