An ordinary dividend is a cash payment a company makes to its shareholders from its profits, taxed as regular income on your tax return

When you own stock in a company, you may receive ordinary dividends — payments the company distributes to shareholders, usually quarterly. The company decides how much to pay per share, and you receive that amount multiplied by the number of shares you own. Unlike may have access to dividends, which get a lower tax rate, ordinary dividends are taxed at your regular income tax rate, the same rate applied to your salary or wages.

The key difference between ordinary and may have access to dividends matters most at tax time. Both come from company profits, but the IRS treats them differently. Ordinary dividends include distributions from real estate investment trusts (REITs), master limited partnerships (MLPs), and certain mutual funds. They also include any dividend payment that does not meet the holding period and other requirements for may have access to status.

Key Takeaways

  • Ordinary dividends are taxed at your ordinary income tax rate, which is higher than the rate for may have access to dividends.
  • You receive ordinary dividends when you own shares in companies, REITs, or mutual funds that distribute profits to shareholders.
  • Your brokerage or the company will send you a Form 1099-DIV each January showing how much you received in ordinary versus may have access to dividends.
  • You must report all ordinary dividends on your tax return, even if the amount is small or the company did not withhold taxes.

How ordinary dividends differ from may have access to dividends

A may have access to dividend receives preferential tax treatment — it is taxed at the long-term capital gains rate (0%, 15%, or 20% depending on your income), which is lower than ordinary income rates (10% through 37%). An ordinary dividend is taxed at your full ordinary income rate.

To may have access to for the lower rate, you must have held the stock for more than 60 days during the 121-day window centered on the ex-dividend date — the date by which you must own the stock to receive that payment. If you sell too soon after buying, or if you held the stock for a short time, the dividend becomes ordinary instead of may have access to. REITs and most mutual fund distributions are almost always ordinary dividends, regardless of how long you have owned them.

Where ordinary dividends come from

Ordinary dividends most commonly come from mutual funds and exchange-traded funds (ETFs) that hold bonds, preferred stock, or other income-producing assets. They also come from REITs, which are required by law to distribute at least 90% of their taxable income to shareholders. Master limited partnerships (MLPs) and certain closed-end funds also typically pay ordinary dividends.

Even stock dividends can be ordinary if you do not meet the holding period requirement. For example, if you buy a stock two weeks before the ex-dividend date and sell it three weeks later, that dividend payment counts as ordinary income, not a may have access to dividend, even though it came from a regular corporation.

How to report ordinary dividends on your taxes

Your brokerage firm or the company paying the dividend will send you a Form 1099-DIV by January 31 each year. This form shows ordinary dividends in Box 1a and may have access to dividends in Box 1b. You report the amount from Box 1a on your tax return as ordinary income.

If you received dividends from multiple sources, you will receive multiple 1099-DIV forms. Add up all the ordinary dividends from all your forms and enter the total on your tax return. You must report ordinary dividends even if the amount is under $10 or if no taxes were withheld. The IRS matches the 1099-DIV your brokerage sends to them with your return, so omitting dividends creates a mismatch that can trigger an audit notice.

Tax withholding on ordinary dividends

Ordinary dividends are not subject to mandatory federal tax withholding the way wages are. Your brokerage may withhold taxes if you request it, but most do not unless you ask. This means you may owe taxes on the dividends when you file your return, even though you did not receive a smaller check.

If you expect to owe a large amount in taxes from dividends and other income, you can make estimated tax payments to the IRS throughout the year, or you can ask your brokerage to withhold taxes on your behalf. Either approach prevents a large tax bill in April. Some people increase the withholding on their paychecks instead, which accomplishes the same goal.

Ordinary dividends in tax-advantaged accounts

If you hold dividend-paying investments inside a traditional IRA, Roth IRA, or 401(k), you do not pay taxes on the ordinary dividends in the year you receive them. The dividends reinvest inside the account and grow tax-deferred. In a Roth IRA, may have access to distributions come out tax-free. In a traditional IRA or 401(k), you pay ordinary income tax on the entire withdrawal amount when you take the money out in retirement.

This tax deferral is one reason dividend-paying investments are often held in retirement accounts. The tax advantage is especially large for ordinary dividends, which would otherwise be taxed at your full income rate every year.

Reinvestment and compounding

Many investors set up dividend reinvestment plans (DRIPs), which automatically use each dividend payment to buy additional shares. This compounds your returns over time — you earn dividends on the new shares, which earn dividends themselves. Reinvested dividends are still taxable in the year you receive them, even though you did not take the cash.

If you reinvest ordinary dividends, you still report them as income on your tax return. You also increase your cost basis (the amount you paid for your shares) by the amount reinvested, which reduces your taxable gain if you later sell the stock. Keep records of all reinvested dividends so you can calculate your cost basis correctly when you sell.

Frequently Asked Questions

Do I have to pay taxes on ordinary dividends if I reinvest them?

Yes. Reinvested dividends are taxable in the year you receive them, even though the cash went directly into buying new shares instead of going to your bank account. You report the full dividend amount on your tax return and increase your cost basis by that amount.

What happens if I receive an ordinary dividend but do not get a 1099-DIV?

Contact your brokerage or the company that paid the dividend. If you received more than $10 in ordinary dividends, you should receive a 1099-DIV. If the amount was under $10, you may not receive a form, but you still must report the dividend on your tax return if you received it.

Can ordinary dividends ever be taxed at the may have access to dividend rate?

No. Ordinary dividends are taxed at your ordinary income rate by definition. If a dividend meets the holding period and other requirements, it is classified as a may have access to dividend from the start. The classification is determined by the type of investment and how long you held it, not by how you report it.

Why are REIT dividends always ordinary?

REITs are required to distribute most of their income to shareholders, and that income comes from rent and other business operations, not from capital gains. The IRS treats these distributions as ordinary income rather than may have access to dividends, regardless of how long you have owned the REIT shares.