Dividend tax is the tax you pay on money a company pays you as a shareholder

When you own stock in a company, that company sometimes distributes profits to shareholders as dividends. The IRS treats dividend income as taxable income, meaning you owe federal tax on it. The amount you owe depends on two things: how much dividend income you received, and whether those dividends are classified as ordinary or may have access to.

Most people who receive dividends pay tax on them through their annual tax return. Your brokerage or the company paying the dividend reports the amount to the IRS on a Form 1099-DIV, and you report it on your return. Some people owe estimated taxes on dividends throughout the year if the amount is large enough.

Key Takeaways

  • may have access to dividends are taxed at lower rates (0%, 15%, or 20%) while ordinary dividends are taxed at your regular income tax rate (up to 37%).
  • To may have access to for the lower rate, you must have held the stock for at least 60 days around the dividend payment date.
  • Your brokerage reports dividend income on Form 1099-DIV, which you use when filing your tax return.
  • Dividend income counts toward your total income and can push you into a higher tax bracket.

may have access to versus ordinary dividends

The IRS divides dividends into two categories, and each is taxed differently. may have access to dividends are taxed at capital gains rates: 0%, 15%, or 20%, depending on your income level. Ordinary dividends are taxed at your regular income tax rate, which ranges from 10% to 37%.

Most dividends from U.S. companies and certain foreign companies are may have access to if you meet the holding period requirement. Dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and some preferred stocks are usually ordinary dividends, even if you hold them for years.

Your brokerage will tell you which dividends are may have access to and which are ordinary. This information appears on your 1099-DIV form in separate boxes.

The holding period requirement for may have access to dividends

To pay the lower capital gains rate on a dividend, you must have owned the stock for at least 60 days during a 121-day window centered on the dividend payment date. This means 60 days before the ex-dividend date through 60 days after it.

If you bought the stock shortly before the dividend payment and sold it shortly after, the dividend is ordinary, not may have access to. The same applies if you held the stock for years but sold it before meeting the 60-day window. The IRS counts only the days you actually owned the shares.

This rule prevents people from buying stock just to collect a dividend and then selling it immediately at a loss while claiming the tax benefit.

How dividend tax affects your overall tax bill

Dividend income is added to your other income—wages, interest, capital gains—to calculate your total taxable income. This matters because it can push you into a higher tax bracket. If you earn $50,000 in wages and receive $20,000 in ordinary dividends, your taxable income is $70,000, which may put you in a higher bracket than $50,000 alone.

may have access to dividends are treated more favorably. They are taxed separately from ordinary income, so they do not push your regular income into a higher bracket. However, they do count toward income thresholds that determine whether you owe other taxes, such as the Net Investment Income Tax (3.8% on investment income for high earners).

If your dividend income is large, you may owe estimated taxes in quarterly installments rather than waiting until you file your return.

Reporting dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 each year, showing all dividends paid to you in the previous year. The form breaks down may have access to dividends, ordinary dividends, capital gain distributions, and other types of income.

You report this information on Schedule B (Interest and Ordinary Dividends) if your ordinary dividends exceed $1,500, or on Form 1040 directly if they are $1,500 or less. may have access to dividends go on Schedule D (Capital Gains and Losses) or Form 8949 (Sales of Capital Assets).

If you receive dividends from multiple sources, each one is reported separately on the 1099-DIV, but you combine them all when you file your return.

Dividend tax in retirement and tax-advantaged accounts

If you hold stocks in a traditional IRA, Roth IRA, or 401(k), you do not pay tax on dividends inside the account. The dividends are reinvested automatically, and you pay tax only when you withdraw money (or never, in the case of a Roth IRA).

This is one reason tax-advantaged retirement accounts are valuable: dividends compound without being reduced by annual taxes. Once you withdraw money from a traditional IRA or 401(k), those withdrawals are taxed as ordinary income, regardless of whether they came from dividends or capital gains.

If you hold stocks in a regular taxable brokerage account, you owe tax on dividends every year, even if you reinvest them.

State and local taxes on dividends

Federal tax is only part of the picture. Most states tax dividend income as well, though the rate and rules vary. Some states tax all dividends at the same rate as ordinary income. Others offer a lower rate for may have access to dividends or exempt certain types of dividend 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 a dividend tax, your total tax bill includes both federal and state taxes.

Check your state's tax authority website or speak with a tax professional to understand how your state treats dividend income.

Frequently Asked Questions

Do I owe tax on dividends I reinvest?

Yes. Even if you automatically reinvest dividends back into the stock, you owe tax on them in the year they are paid. The IRS does not care whether you took the money or left it in the account—it is still taxable income.

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

This can happen if you sold the stock before the payment date but after the ex-dividend date. The person who owned it on the payment date receives the dividend and the 1099-DIV. If you received a 1099-DIV in error, contact your brokerage to request a corrected form.

Can I deduct investment losses against dividend income?

Yes. Capital losses can offset capital gains and up to $3,000 of ordinary income per year. If you have more losses than that, you can carry them forward to future years. This is one way to reduce your overall tax bill if you have both dividend income and investment losses.

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 taxable, but they are taxed differently and reported on different forms.