Dividend tax rates depend on how long you held the stock and your total income

The tax you pay on dividends is not a single rate. The IRS taxes dividends in two categories: may have access to dividends and ordinary dividends. may have access to dividends get a lower rate. Ordinary dividends are taxed at your regular income tax rate, which can be as high as 37 percent depending on your income bracket. Whether your dividends may have access to for the lower rate depends on how long you owned the stock before the company paid the dividend.

If you held the stock for more than 60 days around the dividend payment date, the dividend is usually may have access to. If you held it for a shorter time, or if the dividend came from a money market fund or bond fund, it counts as ordinary income. The difference matters: a may have access to dividend might be taxed at 0, 15, or 20 percent, while an ordinary dividend could be taxed at your full income rate.

Key Takeaways

  • may have access to dividends are taxed at 0, 15, or 20 percent depending on your income; ordinary dividends are taxed at your regular income tax bracket, which ranges from 10 to 37 percent.
  • A dividend is may have access to only if you held the stock for more than 60 days before or after the payment date; shorter holding periods mean ordinary tax rates apply.
  • Your total income for the year determines which rate applies to may have access to dividends — the brackets change annually and are different for single filers, married filing jointly, and other statuses.
  • Some dividends, such as those from money market funds, municipal bonds, or real estate investment trusts, may be taxed differently or not at all.

may have access to dividend tax rates by income level

The three may have access to dividend rates — 0, 15, and 20 percent — are tied to your total taxable income for the year. The IRS sets income thresholds that change each year. For 2024, a single filer with taxable income up to $47,025 pays 0 percent on may have access to dividends. Income from $47,026 to $518,900 is taxed at 15 percent. Income above $518,900 is taxed at 20 percent.

If you are married filing jointly, the thresholds are higher: 0 percent up to $94,050, 15 percent from $94,051 to $583,750, and 20 percent above that. These numbers shift yearly based on inflation. Your "taxable income" includes wages, interest, capital gains, and dividends combined — so a large bonus year or a stock sale can push you into a higher dividend bracket even if the dividend amount itself did not change.

The IRS publishes updated brackets in late fall for the following year. You can find them on the IRS website or ask your tax preparer. If you expect a large dividend or stock sale, calculating your total income early can help you plan whether to time the transaction to stay in a lower bracket.

Ordinary dividend tax rates

Ordinary dividends are taxed as regular income using the standard tax brackets. For 2024, single filers face rates of 10, 12, 22, 24, 32, 35, and 37 percent depending on total income. The 37 percent rate applies to single filers with income over $578,100. Married couples filing jointly face the same rates but at higher income thresholds.

Ordinary dividends include payments from money market funds, bond funds, preferred stocks held for 60 days or fewer, and real estate investment trusts (REITs). Some employers also issue ordinary dividends through employee stock plans. Because ordinary dividends use your full tax bracket rather than the preferential may have access to rate, they can cost significantly more in tax — sometimes double or triple the may have access to rate depending on your income level.

How holding period affects your dividend tax rate

The IRS requires you to hold a stock for more than 60 days during a 121-day window centered on the dividend payment date. This means 60 days before the payment date and 60 days after. If you sell the stock before meeting this requirement, the dividend becomes ordinary income even if the company called it a may have access to dividend.

The holding period rule exists to prevent tax arbitrage — buying a stock just before a dividend payment and selling it immediately after to claim the dividend while avoiding the risk of price movement. If you bought a stock specifically for its dividend, or if you are a frequent trader, check your holding period before the ex-dividend date (the date by which you must own the stock to receive the payment). Your brokerage statement shows the ex-dividend date, and most brokers flag it automatically.

Some investors use this rule strategically: if you are close to a lower tax bracket and expect a large dividend, you might hold the stock longer to ensure it qualifies. Conversely, if you are in a high bracket and expect to move to a lower one next year, you might delay selling until the new year to take advantage of the lower rate.

State and local taxes on dividends

Federal tax is only part of the picture. Most states tax dividend income, and some tax it at a higher rate than capital gains. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages). The remaining states tax dividends as ordinary income using their own brackets.

A few states offer preferential rates for dividends. For example, some states tax long-term capital gains at a lower rate than ordinary income but do not extend that rate to dividends. Others tax dividends the same as wages. Check your state's tax website or ask a tax preparer what rate applies in your state. Combined federal and state rates can range from 0 percent (in a no-tax state with may have access to dividends in the 0 percent federal bracket) to over 50 percent (in a high-tax state with ordinary dividends in the top bracket).

Special dividend situations and exceptions

Not all dividend payments follow the standard rules. Real estate investment trust (REIT) dividends are almost always taxed as ordinary income, even if you held the REIT for years. Master limited partnership (MLP) distributions are often taxed as a return of capital, which reduces your cost basis in the investment rather than creating immediate tax. Mutual fund dividends can be a mix of may have access to and ordinary depending on what the fund holds and how long it held those securities.

If you receive dividends from a foreign company, you may owe U.S. tax on those dividends, and you may also owe tax to the foreign country. The U.S. has tax treaties with many countries to prevent double taxation, but the rules are complex. Some foreign dividends come with a foreign tax credit you can claim on your U.S. return. If you own foreign stocks or funds, keep records of any foreign taxes paid and discuss them with a tax preparer.

Dividends reinvested through a dividend reinvestment plan (DRIP) are still taxable in the year received, even though you did not receive cash. The IRS treats reinvested dividends as if you received the cash and immediately bought more shares. You owe tax on the full dividend amount, and your cost basis increases by the amount reinvested.

How to report dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 each year. This form lists may have access to dividends, ordinary dividends, capital gains, and other distributions separately. You report may have access to dividends on Schedule B (if you have more than $1,500 in interest or dividends) or directly on Form 1040. Ordinary dividends go on the same line as may have access to dividends but are taxed at your regular rate.

If you received dividends from multiple brokerages or investments, you will receive multiple 1099-DIVs. Add them all together on your return. The IRS matches your reported dividends against the 1099-DIVs sent to them, so report the same amounts the forms show. If there is a discrepancy, the IRS will contact you.

Some dividend income may not appear on a 1099-DIV. For example, if you own shares in a private company or a closely held corporation, you may receive dividends without a 1099. You still owe tax on those dividends and should report them on your return. Keep your own records of any dividends not reported on a 1099.

Frequently Asked Questions

What is the difference between may have access to and ordinary dividends?

may have access to dividends are taxed at preferential rates of 0, 15, or 20 percent if you held the stock for more than 60 days around the payment date. Ordinary dividends are taxed at your regular income tax rate, which can be as high as 37 percent. The same company might pay both types depending on the type of security.

Do I pay tax on dividends if I reinvest them?

Yes. The IRS taxes dividends in the year you receive them, regardless of whether you take the cash or reinvest it through a DRIP. Your brokerage reports the full dividend amount on your 1099-DIV, and you owe tax on it even if you never saw the money.

Can I lower my dividend tax by timing when I sell a stock?

Possibly. If you are close to a lower tax bracket, holding a stock past the 60-day requirement to may have access to the dividend can save money. Conversely, if you expect to move to a lower bracket next year, you might delay selling until then. A tax preparer can model these scenarios for your specific situation.

Are dividends from mutual funds taxed differently than dividends from individual stocks?

Mutual fund dividends can be a mix of may have access to and ordinary depending on what the fund owns and how long it held those securities. The fund reports each type separately on your 1099-DIV. Bond funds and money market funds typically distribute ordinary income, while stock funds may distribute may have access to dividends.

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

The IRS receives a copy of your 1099-DIV and will notice if your return does not match. Unreported income can result in penalties, interest, and an audit. Report all dividends shown on your 1099-DIVs, even if you think the amount is wrong — contact your brokerage to correct errors before filing.