Dividends are taxed differently depending on whether they are ordinary or may have access to, and the rate you pay depends on your total income for the year

When you receive a dividend from a stock or mutual fund, the IRS taxes it as income. But the tax rate is not the same for everyone, and it is not the same as the tax rate on your wages. The two main categories are ordinary dividends and may have access to dividends. Ordinary dividends are taxed at your regular income tax rate — the same bracket that applies to your salary. may have access to dividends get preferential rates that are usually lower: 0%, 15%, or 20%, depending on your income level.

Your brokerage account sends you a Form 1099-DIV each January showing how much you received and which category each dividend falls into. You report this on your tax return, and the IRS calculates what you owe based on your filing status and total income that year. If you did not receive a 1099-DIV but you know you got dividends, contact the company that paid them and ask for a corrected form.

Key Takeaways

  • may have access to dividends are taxed at 0%, 15%, or 20% depending on your income bracket, while ordinary dividends are taxed at your regular income tax rate.
  • To may have access to for the lower rates, you must have held the stock for at least 60 days around the dividend payment date.
  • Your brokerage sends Form 1099-DIV in January, which shows the dividend amount and type; you report this on your tax return.
  • If your total income is low enough, you may owe no tax on may have access to dividends even though you received them.

The difference between ordinary and may have access to dividends

An ordinary dividend is the default category. Most dividends from real estate investment trusts (REITs), preferred stock, and money market funds fall here. So do dividends from foreign companies unless they meet specific conditions. Ordinary dividends are added to your other income and taxed at your marginal rate — the same percentage that applies to your last dollar of wages.

A may have access to dividend comes from a U.S. company or a may have access to foreign corporation, and you must have held the stock long enough. The holding period rule is strict: you need to own the shares for at least 60 days during the 121-day window that starts 60 days before the ex-dividend date. If you bought the stock a week before the dividend and sold it a week after, the dividend does not may have access to. Your brokerage tracks this automatically and reports the category on your 1099-DIV, so you do not have to calculate it yourself.

The tax rates for may have access to dividends are 0%, 15%, or 20%. Which rate you pay depends on your taxable income and filing status. For 2024, the 0% rate applies to single filers with taxable income up to $47,025, and married filing jointly filers up to $94,050. The 15% rate covers the middle range, and 20% applies to the highest earners. These income thresholds change each year.

How your income level determines your tax rate

The IRS does not look at your dividend income alone. It adds your dividends to your wages, interest, capital gains, and other income to find your total taxable income. That combined number determines which tax bracket you fall into, and that bracket determines your rate on may have access to dividends.

This means a person earning $40,000 in wages and receiving $5,000 in may have access to dividends pays 0% tax on the dividends because their total income stays below the threshold. But someone earning $50,000 in wages and receiving the same $5,000 in dividends pays 15% on part of it, because the combined income crosses into the next bracket. The exact calculation depends on your filing status (single, married filing jointly, head of household, or married filing separately) and whether you claim the standard deduction or itemize.

Ordinary dividends follow your regular income tax brackets, which are higher. For 2024, the lowest bracket is 10%, and rates go up to 37% for the highest earners. If you receive $5,000 in ordinary dividends and you are in the 22% bracket, you owe $1,100 in tax on those dividends alone.

When you owe taxes on dividends you reinvest

Many people set their brokerage account to automatically reinvest dividends — the cash gets used to buy more shares instead of landing in your account. You still owe tax on the full dividend amount, even though you never touched the money. The IRS taxes the dividend in the year you received it, regardless of whether you took the cash or reinvested it.

This is a common surprise for new investors. You might think "I did not take the money out, so I do not owe tax," but that is not how it works. Your 1099-DIV will show the reinvested amount, and you report it on your return. The cost basis of the new shares you bought with the reinvested dividend is the dividend amount itself, which reduces your taxable gain when you eventually sell those shares.

Dividends in tax-advantaged accounts

If you hold dividend-paying stocks inside a traditional IRA, Roth IRA, or 401(k), you do not owe tax on the dividends in the year you receive them. The account itself is tax-sheltered, so dividends accumulate without triggering a tax bill. When you withdraw money from a traditional IRA or 401(k) in retirement, that withdrawal is taxed as ordinary income. Roth IRA withdrawals are tax-free if you follow the rules.

This tax deferral is one reason people use retirement accounts for dividend-paying stocks. You can reinvest dividends and let them compound without paying tax each year. However, if you hold dividend stocks in a regular taxable brokerage account, you cannot avoid the annual tax bill.

How to report dividends on your tax return

Your brokerage sends Form 1099-DIV by January 31 each year. This form shows the total ordinary dividends, may have access to dividends, capital gain distributions, and other income in separate boxes. You receive a copy and the IRS receives a copy. If the amounts are wrong, contact your brokerage and ask for a corrected form before you file.

On your tax return, you report dividends on Schedule B (if you have more than $1,500 in interest and dividends) or directly on Form 1040 if the amount is smaller. Tax software walks you through this step and pulls the information from your 1099-DIV. The software calculates your tax bracket and applies the correct rate to may have access to dividends automatically.

If you received dividends from a foreign company, you may see a foreign tax credit on your 1099-DIV. This means the foreign country withheld tax on the dividend. You can claim this credit on your U.S. return to avoid paying tax twice on the same income.

State and local taxes on dividends

Federal tax is only part of the picture. Most states tax dividend income as well, usually at the same rate as ordinary income. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividend income at all. If you live in a state with an income tax, check your state's rules, because the tax rate and treatment of may have access to versus ordinary dividends can differ from federal rules.

Some states offer preferential rates for may have access to dividends, similar to federal treatment. Others tax all dividends at the regular income tax rate. A handful of states tax only certain types of dividends. Your state tax return will have a line for dividend income, and your tax software will calculate what you owe based on your state of residence.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. The IRS taxes dividends in the year you receive them, whether you take the cash or reinvest it in more shares. Your 1099-DIV reports the full amount, and you report it on your tax return. The reinvested amount becomes the cost basis of the new shares you bought.

What is the difference between a dividend and a capital gain?

A dividend is a payment a company makes to shareholders from its profits. A capital gain is the profit you make when you sell a stock for more than you paid for it. Both are taxed, but dividends are taxed in the year you receive them, while capital gains are taxed only when you sell. may have access to dividends and long-term capital gains often get the same preferential tax rates.

Can I deduct dividend losses?

No. Dividends are income, not losses. If a stock pays a dividend and then drops in value, you still owe tax on the dividend. You can deduct the loss when you sell the stock for less than you paid, but that is separate from the dividend tax.

What happens if I do not report a dividend on my tax return?

The IRS receives a copy of your 1099-DIV from your brokerage. If you do not report the dividend, the IRS will notice the discrepancy and may send you a notice asking for the tax owed plus penalties and interest. It is easier and cheaper to report it correctly the first time.

Are mutual fund dividends taxed the same way as stock dividends?

Mostly yes. Mutual funds distribute ordinary dividends and capital gains to shareholders, and you report both on your tax return. The fund sends you a Form 1099-DIV showing the breakdown. Some mutual funds hold may have access to dividend-paying stocks, so part of your distribution may may have access to for the lower rates, but this depends on the fund's holdings and how long you held the fund shares.