Dividend tax rates depend on how long you held the stock and your total income for the year
The tax you pay on dividends is not a single fixed rate. The IRS taxes most dividends at one of three rates — 0%, 15%, or 20% — based on your tax bracket (which depends on your total income) and how long you owned the stock before it paid the dividend. Some dividends, called may have access to dividends, get these preferential rates. Other dividends, called ordinary or non-may have access to dividends, are taxed as regular income at rates up to 37%.
The difference between may have access to and ordinary matters enormously. A may have access to dividend taxed at 15% costs you far less than the same dollar amount taxed as ordinary income at 24% or 32%. The holding period rule is strict: you must have owned the stock for more than 60 days during the 121-day window centered on the ex-dividend date. If you don't meet that test, the dividend is ordinary income no matter what.
Key Takeaways
- may have access to dividends are taxed at 0%, 15%, or 20% depending on your tax bracket; ordinary dividends are taxed at your regular income tax rate, which can be as high as 37%.
- To may have access to for the lower rates, you must have held the stock for more than 60 days within a 121-day window centered on the ex-dividend date.
- Your tax bracket is determined by your total income for the year, not by the dividend amount alone.
- Dividends from certain investments — like money market funds, bonds, and REITs — are almost always taxed as ordinary income, not may have access to dividends.
- You report dividends on your tax return using Form 1099-DIV, which your broker sends by January 31 each year.
The three may have access to dividend tax rates and which bracket you fall into
If a dividend meets the holding period test, the rate you pay depends on your taxable income for the year. The IRS sets income thresholds that change annually. For 2024, the may have access to dividend rates are:
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 | Up to $62,975 |
| 15% | $47,025 to $518,900 | $94,050 to $583,750 | $62,975 to $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
These thresholds are your taxable income, not your gross income. Taxable income is what remains after you subtract the standard deduction and any other deductions you claim. If you are single, earn $50,000 in wages, and receive $3,000 in may have access to dividends, your taxable income is roughly $50,000 (after the standard deduction), which puts you in the 15% bracket for those dividends.
The thresholds shift each year for inflation. Check the IRS website or your tax software for the current year's numbers before you file.
Ordinary dividends and why they cost more
Dividends that do not meet the holding period test are taxed as ordinary income. This means they are added to your wages, interest, and other income and taxed at your regular marginal rate — anywhere from 10% to 37%, depending on your total income and filing status.
Ordinary dividends are common from certain types of investments. Dividends from REITs (real estate investment trusts), master limited partnerships, and preferred stock are almost always ordinary income. Dividends from bonds and bond funds are ordinary income. Money market fund distributions are ordinary income. If you hold a stock for fewer than 61 days, any dividend it pays during that period is ordinary income, even if the company itself pays may have access to dividends to long-term holders.
The tax hit can be substantial. If you are in the 32% federal tax bracket and receive $1,000 in ordinary dividends, you owe $320 in federal tax. The same $1,000 in may have access to dividends at the 15% rate costs you $150 — a difference of $170 on a single payment.
How to verify whether a dividend qualifies
Your broker reports dividends on Form 1099-DIV, which you receive by January 31 each year. The form separates may have access to dividends from ordinary dividends in different boxes. Box 1a shows ordinary dividends; Box 1b shows may have access to dividends. If a dividend appears in Box 1b, your broker has already determined it meets the holding period test.
You are not required to verify the holding period yourself — the broker does that work. However, if you sold the stock shortly after receiving the dividend, or if you bought it shortly before, the holding period rule may disqualify it. Some brokers make mistakes. If you are uncertain, you can calculate the holding period yourself: count the days you owned the stock, starting the day after you bought it and ending the day you sold it. The ex-dividend date (the date by which you must own the stock to receive the dividend) is listed on the company's investor relations website or on financial data sites like Yahoo Finance or Morningstar.
If your broker reports a dividend as may have access to but you did not meet the holding period, contact the broker to request a corrected Form 1099-DIV before you file your tax return.
State and local taxes on dividends
Federal tax is only part of the picture. Most states tax dividend income, and some tax it differently than they tax wages. A few states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividend income at all. Others tax dividends at the same rate as ordinary income. A handful, including Vermont and Maine, tax may have access to dividends at a lower rate than ordinary income, mirroring the federal system.
Your state tax bill depends on where you live and where you file your tax return, not where the company is incorporated. If you live in New York and own stock in a California company, you pay New York tax on the dividend. Check your state's tax department website for the current dividend tax rate in your state.
Dividends in retirement accounts and why they are not taxed annually
If you hold dividend-paying stocks inside a 401(k), IRA, or other retirement account, you do not pay tax on the dividends in the year they are paid. The dividends accumulate inside the account tax-free. You pay tax only when you withdraw money from the account — and at that point, the entire withdrawal is taxed as ordinary income, regardless of whether it came from dividends, capital gains, or the original money you contributed.
This is one reason retirement accounts are valuable for dividend investors. You can reinvest dividends without worrying about the annual tax bill, and the compounding effect is more powerful. The trade-off is that when you eventually withdraw, you cannot use the preferential may have access to dividend rates; everything comes out as ordinary income.
How dividend taxes affect your overall tax bill
Dividends can push you into a higher tax bracket, which affects not just the dividends themselves but also your other income. If you are a single filer earning $45,000 in wages and you receive $5,000 in may have access to dividends, your taxable income is roughly $50,000. That $5,000 in dividends may push you from the 0% may have access to dividend bracket into the 15% bracket, meaning you pay 15% on the dividends and possibly a higher rate on some of your wages as well.
This is called bracket creep. It is not a penalty — it is how the progressive tax system works — but it means the effective tax rate on your dividends may be higher than the stated rate for your bracket. Tax software and your tax preparer account for this automatically when they calculate your bill.
Frequently Asked Questions
Do I have to pay tax on dividends I reinvest?
Yes. Whether you take the dividend as cash or reinvest it in more shares, you owe tax in the year the dividend is paid. The IRS taxes the cash value of the dividend, not the number of shares you receive. Reinvestment does not defer or reduce the tax.
What if I inherited dividend-paying stock?
You inherit the stock at its market value on the date of death (called a step-up in basis). Any dividends paid after you inherit are taxed to you as the new owner. The holding period for may have access to dividend treatment starts fresh on the date you inherited the stock, not the date the previous owner bought it.
Are stock dividends taxed differently than cash dividends?
Stock dividends (where the company issues new shares instead of cash) are generally not taxed when issued. You pay tax only when you sell the shares. Cash dividends are taxed in the year paid. Some companies offer both; the tax treatment depends on which type you receive.
Can I deduct investment losses to offset dividend taxes?
Yes. If you sell a stock at a loss, you can use that loss to offset capital gains and up to $3,000 of ordinary income (including dividends) in the same year. Unused losses carry forward to future years. This strategy, called tax-loss harvesting, is common among dividend investors.
What happens if I sell a stock right after it pays a dividend?
You still owe tax on the dividend. The tax is based on whether you met the holding period at the time the dividend was paid, not on when you sell. If you held the stock for more than 60 days before the ex-dividend date, the dividend is may have access to even if you sell the next day.