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

Ordinary dividends are payments a company makes to its shareholders from profits or retained earnings. They are taxed at your ordinary income tax rate — the same rate you pay on wages or salary — rather than at the preferential rate applied to long-term capital gains. This is the key difference between ordinary dividends and may have access to dividends, which receive preferential tax treatment.

When you receive an ordinary dividend, the company reports it to you and the IRS on a Form 1099-DIV. You must report this income on your tax return, and you will owe federal income tax on the full amount. Some states also tax dividend income. The tax you owe depends on your total income for the year and your tax bracket.

Most dividends paid by U.S. corporations are ordinary dividends unless they meet specific requirements to be classified as may have access to. Understanding which type you hold matters because the tax difference can be substantial — ordinary dividends may be taxed at rates up to 37 percent, while may have access to dividends top out at 20 percent.

Key Takeaways

  • Ordinary dividends are taxed at your full income tax rate, which can range from 10 percent to 37 percent depending on your income and filing status.
  • You receive a Form 1099-DIV from the company or your brokerage showing the amount of ordinary dividends paid to you during the year.
  • may have access to dividends receive preferential tax rates (0, 15, or 20 percent) if you held the stock for more than 60 days around the dividend payment date.
  • Dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and certain preferred stocks are often ordinary dividends regardless of how long you held them.

When dividends are classified as ordinary rather than may have access to

A dividend is ordinary if it does not meet the IRS requirements for may have access to status. The main requirement for may have access to treatment is that you must have held the stock for more than 60 days during a 121-day window centered on the dividend payment date. If you held the stock for 60 days or fewer, the dividend is ordinary.

Certain types of investments almost always pay ordinary dividends. Real estate investment trusts (REITs) distribute ordinary dividends by law. Master limited partnerships (MLPs) typically pay ordinary dividends. Dividends from preferred stocks, money market funds, and bonds are usually ordinary. Dividends paid by foreign corporations that do not meet U.S. tax treaty requirements are also ordinary.

If you buy a stock just before the dividend payment date and sell it shortly after, any dividend you receive will be ordinary, not may have access to. This is true even if the company normally pays may have access to dividends to long-term holders. The holding period rule exists to prevent investors from collecting dividends without bearing the risk of stock ownership.

How ordinary dividends appear on your tax forms

Your brokerage or the company paying the dividend sends you a Form 1099-DIV by January 31 of the following year. This form shows ordinary dividends in Box 1a and may have access to dividends in Box 1b. If you received only ordinary dividends, Box 1b will be blank or zero. You may also see capital gain distributions in Box 2a or 2b if you own mutual funds or exchange-traded funds.

You report the amount from Box 1a (ordinary dividends) on your Form 1040 or 1040-SR under "Ordinary dividends." This amount is added to your other income — wages, interest, self-employment income, and so on — to calculate your total taxable income for the year. Your tax bracket is then determined by this total, and ordinary dividends are taxed at whatever rate applies to your bracket.

If you received dividends from multiple sources, you will receive multiple 1099-DIV forms. Add up all the ordinary dividends from all forms and report the total on your return. Keep copies of all 1099-DIV forms you receive for your records.

The tax rate difference between ordinary and may have access to dividends

Ordinary dividends are taxed at your marginal income tax rate. For the 2024 tax year, federal rates range from 10 percent to 37 percent depending on your filing status and total income. A person in the 24 percent tax bracket pays 24 cents in federal tax on every dollar of ordinary dividend income.

may have access to dividends, by contrast, are taxed at preferential rates: 0 percent, 15 percent, or 20 percent, depending on your income level. Most taxpayers in the middle brackets pay 15 percent on may have access to dividends. This preferential rate applies only to may have access to dividends; ordinary dividends get no such break.

The difference compounds over time. A $1,000 ordinary dividend taxed at 24 percent costs you $240 in federal tax. The same $1,000 in may have access to dividends costs $150. Over a portfolio of many dividend-paying stocks, the tax savings from holding may have access to dividends can be thousands of dollars per year.

Dividends from specific investment types that are usually ordinary

REITs are required by law to distribute at least 90 percent of their taxable income to shareholders. These distributions are classified as ordinary income, not may have access to dividends. If you own a REIT mutual fund or ETF, the dividends it pays to you are ordinary, even if the underlying REIT held its properties for decades.

MLPs and other partnership structures pass through ordinary income to their partners. If you own an MLP directly or through a fund, distributions are taxed as ordinary income. Some MLPs also issue K-1 forms instead of 1099-DIVs, which complicates tax reporting but does not change the ordinary classification.

Preferred stocks often pay ordinary dividends. While some preferred stocks may may have access to for preferential dividend treatment, many do not. Check the 1099-DIV you receive to see whether your preferred stock dividends are in Box 1a (ordinary) or Box 1b (may have access to).

What happens if you do not report ordinary dividends

The IRS receives a copy of every 1099-DIV issued to you. If you do not report the dividend income on your tax return, the IRS will notice the discrepancy. The agency matches 1099 forms to tax returns automatically and flags mismatches for review.

Failing to report dividend income can result in penalties, interest charges, and potential audit. The penalty for underreporting income is typically 20 percent of the underpaid tax, plus interest calculated from the original due date. If the IRS determines the underreporting was intentional, criminal penalties are possible, though rare for simple dividend omissions.

If you made an honest mistake, filing an amended return (Form 1040-X) as soon as you realize the error reduces penalties. The IRS is more lenient with taxpayers who correct errors voluntarily than with those caught during an audit.

Frequently Asked Questions

Can I avoid paying tax on ordinary dividends?

No. Ordinary dividends are taxable income and must be reported on your tax return. You cannot avoid the tax by not cashing the dividend check or by holding the stock in a regular brokerage account. The only way to defer or avoid dividend tax is to hold dividend-paying stocks inside a tax-deferred account like a 401(k) or traditional IRA, where dividends accumulate without triggering annual tax.

Why did my dividend get classified as ordinary instead of may have access to?

The most common reason is that you did not hold the stock long enough. You must own the stock for more than 60 days within a 121-day window around the dividend payment date. If you bought the stock shortly before the dividend date or sold it shortly after, the holding period requirement is not met. Some investments, like REITs and MLPs, always pay ordinary dividends regardless of holding period.

Do I have to pay state tax on ordinary dividends?

Most states tax dividend income as ordinary income. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividend income. If you live in a state that taxes dividends, you will owe state tax in addition to federal tax. Check your state's tax rules or consult a tax professional for your specific situation.

What if I received a 1099-DIV but did not actually receive the money?

If dividends were reinvested automatically into additional shares, you still owe tax on the amount reinvested. The IRS treats reinvested dividends as income in the year they are paid, not when you eventually sell the shares. Report the full amount shown on the 1099-DIV, even if you did not receive cash.