The core difference: tax rate

may have access to dividends are taxed at the long-term capital gains rate, which is lower than your ordinary income tax rate. Ordinary dividends are taxed as regular income at whatever tax bracket you fall into. That is the entire distinction that matters for your tax bill.

If you are in the 24% tax bracket, ordinary dividends are taxed at 24%. may have access to dividends in the same situation are taxed at either 0%, 15%, or 20%, depending on your total income — not your tax bracket. This difference can save you hundreds or thousands of dollars per year if you hold a large dividend portfolio.

The IRS publishes the long-term capital gains rates and income thresholds each year. For 2024, the 0% rate applies to single filers earning under $47,025; the 15% rate applies from $47,025 to $518,900; and the 20% rate applies above that. These thresholds are different from ordinary income brackets and change annually.

Key Takeaways

  • may have access to dividends use long-term capital gains tax rates (0%, 15%, or 20%), while ordinary dividends use your regular income tax rate, which is usually higher.
  • To may have access to as a may have access to dividend, you must have held the stock for more than 60 days during the 121-day window surrounding the ex-dividend date.
  • Your brokerage reports which dividends are may have access to and which are ordinary on Form 1099-DIV, so you do not have to calculate this yourself.
  • Dividends from most U.S. corporations and many foreign corporations are may have access to if you meet the holding period; dividends from money market funds, bonds, and REITs are usually ordinary.
  • The tax savings from may have access to dividends can be substantial, but only if you hold stocks long enough — selling too soon disqualifies the dividend.

What makes a dividend "may have access to"

A dividend is may have access to only if you meet a holding period requirement. You must own the stock for more than 60 days during a 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the cutoff: if you buy the stock on or after that date, you do not receive the dividend at all.

The 121-day window exists to prevent you from buying a stock right before it pays a dividend, collecting the may have access to dividend, and selling immediately. If you sell within 60 days of the ex-dividend date, the IRS reclassifies that dividend as ordinary, even if your brokerage initially reported it as may have access to. This rule applies per share, so you could own the same stock for different lengths of time if you bought it in separate transactions.

Dividends paid by certain types of companies are never may have access to, no matter how long you hold them. These include money market funds, bond funds, REITs (real estate investment trusts), and most foreign corporations. Your brokerage statement or Form 1099-DIV will tell you which dividends are ordinary and which are may have access to.

How your brokerage reports these dividends

Your brokerage sends you a Form 1099-DIV each January for the previous year. This form separates your dividends into categories: Box 1a shows ordinary dividends, and Box 1b shows may have access to dividends. You do not have to figure out which is which — the brokerage does this work based on the holding period and the type of security.

If your brokerage makes an error, you can correct it when you file your tax return. Keep your purchase and sale confirmations so you can prove the holding period if the IRS questions the classification. Most errors are caught by the IRS's automated systems, which cross-reference Forms 1099-DIV with your tax return.

If you receive dividends from multiple brokerages, each one sends its own Form 1099-DIV. You will combine all may have access to dividends and all ordinary dividends on your tax return, regardless of which brokerage paid them.

Tax brackets and the long-term capital gains rates

The long-term capital gains rates are not the same as ordinary income tax brackets, and they do not stack on top of your ordinary income in the way you might expect. Instead, may have access to dividends are taxed at the capital gains rate that corresponds to your total taxable income.

If you are single and earn $50,000 in wages plus $5,000 in may have access to dividends, your total taxable income is $55,000. You look up the capital gains rate for a single filer earning $55,000 — which is 15% for 2024 — and pay that rate on the may have access to dividends. You do not pay 15% on top of your ordinary income tax; the capital gains rate replaces the ordinary rate for those dividends.

This is why may have access to dividends can push you into a higher capital gains bracket without pushing you into a higher ordinary income bracket. If you are near the edge of a capital gains threshold, a large may have access to dividend could increase your tax rate on that dividend, but it would not affect the tax rate on your wages.

Which companies pay may have access to versus ordinary dividends

Dividends from most U.S. corporations are may have access to if you meet the holding period. This includes large-cap stocks, mid-cap stocks, and many small-cap stocks. Dividends from foreign corporations are may have access to only if the stock is traded on a U.S. exchange or the company is incorporated in a U.S. possession.

Ordinary dividends come from money market funds, bond funds, preferred stock (in some cases), REITs, and master limited partnerships (MLPs). Dividends from mutual funds that invest in bonds are ordinary, even if the fund itself holds may have access to dividend stocks. The type of asset determines the treatment, not the fund that holds it.

If you own a mutual fund or exchange-traded fund (ETF) that holds a mix of stocks and bonds, the fund's dividend statement will break down how much of your distribution is may have access to and how much is ordinary. This breakdown is based on what the fund owns, not on how long you have owned the fund.

The tax impact on your return

may have access to dividends reduce your tax bill more than ordinary dividends because the rate is lower. A $1,000 may have access to dividend taxed at 15% costs you $150, while a $1,000 ordinary dividend taxed at 24% costs you $240. Over a portfolio of thousands of dollars in annual dividends, this difference compounds.

Some people in the 0% capital gains bracket pay no federal tax on may have access to dividends at all. For 2024, a single filer can earn up to $47,025 in total income and still fall in the 0% bracket. If your wages are below that threshold, your may have access to dividends may not be taxed federally, though they still count toward your total income for other purposes.

State taxes on dividends vary widely. Some states tax may have access to and ordinary dividends the same way; others give may have access to dividends a lower rate or exemption. Check your state's tax rules, because the federal savings may not apply at the state level.

What happens if you sell the stock before the holding period ends

If you sell a stock before you have held it for more than 60 days in the 121-day window, any dividend it paid becomes ordinary income, not may have access to. The IRS applies this rule retroactively: your brokerage may initially report the dividend as may have access to, but you must correct it when you file your return if you sold too soon.

This rule is easy to miss if you buy a stock right before it pays a dividend and sell shortly after. You receive the dividend payment, your brokerage reports it as may have access to, and then you sell. When you file your taxes, you have to reclassify that dividend as ordinary and recalculate your tax bill. Keeping a spreadsheet of purchase and sale dates helps you track which dividends may have access to.

Some investors deliberately hold stocks through the ex-dividend date to capture the dividend, then sell immediately after. If you do this, the dividend will be ordinary, not may have access to, because you did not hold the stock for 60 days. The dividend payment itself is still yours, but it is taxed at your ordinary rate.

Frequently Asked Questions

Do I have to do anything to get the may have access to dividend rate, or does my brokerage handle it?

Your brokerage handles the classification automatically. You do not have to take any action. The brokerage reports may have access to and ordinary dividends separately on Form 1099-DIV, and you enter those amounts on your tax return. If the brokerage makes an error, you can correct it when you file.

What if I bought the stock through a dividend reinvestment plan (DRIP)?

The holding period still applies. If you bought shares through a DRIP and sold them before holding them for 60 days in the 121-day window, any dividend paid on those shares is ordinary. Each purchase through the DRIP is treated as a separate transaction with its own holding period.

Are dividends from my 401(k) or IRA may have access to or ordinary?

The distinction does not matter inside a 401(k) or traditional IRA because those accounts are tax-deferred. You do not pay tax on dividends when they are earned; you pay tax when you withdraw money from the account. In a Roth IRA, may have access to and ordinary dividends are never taxed, even when you withdraw.

Can I lose the may have access to dividend rate if I hold the stock for years?

No. Once you have held the stock for more than 60 days in the 121-day window, the dividend is may have access to. Holding it longer does not change that. The only way to lose the may have access to rate is to sell the stock before the 60-day holding period is complete.

Do foreign taxes on dividends affect whether they are may have access to?

No. A dividend is may have access to or ordinary based on the holding period and the type of company, not on whether you paid foreign taxes. If you paid foreign taxes on a may have access to dividend, you may be able to claim a foreign tax credit, but that is separate from the may have access to dividend classification.