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

The tax rate on dividends is not one number. The IRS taxes most dividends at one of three rates — 0%, 15%, or 20% — based on your tax bracket (which depends on your income) and how long you owned the stock before it paid the dividend. Some dividends, called may have access to dividends, get this preferential treatment. Others, called non-may have access to dividends, are taxed as ordinary income at rates up to 37%.

The holding period matters because Congress created lower rates to encourage long-term investing. If you held the stock for more than 60 days around the dividend payment date, the dividend is usually may have access to and taxed at the lower rates. If you held it for a shorter time, or if the dividend comes from certain sources like money market funds or bonds, it counts as non-may have access to income.

Key Takeaways

  • may have access to dividends are taxed at 0%, 15%, or 20% depending on your tax bracket; non-may have access to dividends are taxed as ordinary income at rates up to 37%.
  • To get the lower may have access to rate, you must have owned the stock for more than 60 days during the 121-day window centered on the dividend payment date.
  • Your tax bracket is determined by your total income for the year, not by the dividend amount alone.
  • State and local taxes on dividends vary by location and can add 0% to over 13% on top of federal tax.
  • The IRS requires your brokerage to report dividend income on Form 1099-DIV, which you receive by January 31 each year.

may have access to dividends and the three federal tax rates

If a dividend meets the IRS definition of may have access to, it is taxed at one of three rates based on your 2024 tax bracket. For single filers, the 0% rate applies if your taxable income is $47,025 or less. The 15% rate applies to income between $47,026 and $518,900. The 20% rate applies to income above $518,900. These income thresholds change each year with inflation.

The key word is taxable income, not gross income. Taxable income is what remains after you subtract the standard deduction (or itemized deductions) and other adjustments. A person earning $60,000 in wages might have taxable income of only $47,000 after the standard deduction, which would put some or all of their dividends in the 0% bracket.

To may have access to for these lower rates, the dividend must come from a U.S. corporation or a may have access to foreign corporation, and you must have held the stock for more than 60 days during a 121-day window. The window starts 60 days before the ex-dividend date (the date by which you must own the stock to receive the dividend) and ends 60 days after it. If you sold the stock before meeting this holding period, the dividend is non-may have access to.

Non-may have access to dividends taxed as ordinary income

Dividends that do not meet the may have access to definition are taxed as ordinary income at your regular tax bracket rate, which can be as high as 37% at the federal level. Non-may have access to dividends include distributions from money market funds, bond funds, real estate investment trusts (REITs), and master limited partnerships (MLPs). They also include any dividend from a stock you held for 60 days or fewer.

Because non-may have access to dividends are taxed at higher rates, they can significantly increase your tax bill. A person in the 24% tax bracket who receives $5,000 in non-may have access to dividends pays $1,200 in federal tax on that income alone. The same person receiving $5,000 in may have access to dividends would pay $750 (at the 15% rate), a difference of $450.

State and local taxes on dividends

Federal tax is only part of the picture. Most states also tax dividend income, and the rates vary widely. Nine states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire — do not tax dividend income at all. New Hampshire taxes only interest and dividends, at a rate of 5% on dividends.

Other states tax dividends as part of ordinary income. California's top rate is 13.3%. New York's is 10.9%. Some states offer small deductions or credits for dividend income, but most do not. If you live in a state with income tax and receive significant dividends, add the state rate to your federal rate to see your true tax burden.

Local taxes apply in some cities and counties as well. New York City, for example, taxes residents on dividend income as part of the city income tax, which ranges from 3.876% to 4.5% depending on income. These local taxes stack on top of state and federal taxes.

How to report dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 each year, listing all dividends paid to you in the previous year. The form separates may have access to dividends from non-may have access to dividends, so you know which rate applies to each. You report this information on Schedule B (Interest and Ordinary Dividends) and Schedule D (Capital Gains and Losses) of your Form 1040.

If your total dividends for the year are $1,500 or less and you have no other investment income, you can report them directly on Form 1040 without using Schedule B. For larger amounts or if you have capital gains, you must use the schedules. The IRS cross-checks your return against the 1099-DIV your brokerage filed, so the numbers must match.

Keep records of when you bought and sold each stock, because the holding period determines whether dividends are may have access to. If the IRS questions your return, you will need to show that you held the stock for more than 60 days around the ex-dividend date.

How dividend reinvestment affects your tax bill

Many investors use dividend reinvestment plans (DRIPs), which automatically buy new shares with the dividend payment instead of sending cash to your account. Reinvesting does not reduce your taxes. You still owe tax on the full dividend amount in the year it was paid, even though you did not receive the cash. The cost basis of the new shares purchased is the fair market value on the reinvestment date.

This creates a record-keeping burden. If you reinvest dividends for years, you accumulate many small purchases at different prices. When you eventually sell the stock, you need to calculate the cost basis of each reinvested share to determine your capital gain or loss. Many investors use their brokerage's average cost method to simplify this, though other methods are allowed.

Tax-advantaged accounts and dividend taxation

If you hold dividend-paying stocks inside a 401(k), IRA, or other tax-advantaged retirement account, you pay no tax on the dividends in the year they are paid. The dividends remain inside the account and compound tax-free until you withdraw money in retirement. This is one reason financial advisors often recommend holding dividend stocks in retirement accounts rather than in taxable brokerage accounts.

In a traditional IRA or 401(k), you pay tax on withdrawals at your ordinary income rate in retirement. In a Roth IRA, may have access to withdrawals are tax-free. The tax deferral or elimination is one of the main benefits of these accounts, and it applies to all investment income, including dividends.

Frequently Asked Questions

Do I pay tax on dividends if I reinvest them?

Yes. The IRS taxes dividends in the year they are paid, regardless of whether you take the cash or reinvest it in new shares. You owe tax on the full dividend amount even if you never see the money.

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

may have access to dividends are taxed at 0%, 15%, or 20% based on your tax bracket. Non-may have access to dividends are taxed as ordinary income at rates up to 37%. To be may have access to, the dividend must come from a U.S. or may have access to foreign corporation, and you must have held the stock for more than 60 days around the ex-dividend date.

Can I avoid paying tax on dividends?

You cannot avoid tax on dividends in a taxable account, but you can defer or eliminate it by holding dividend stocks in a 401(k) or IRA. You can also reduce your tax bill by holding stocks long enough to may have access to for the lower dividend rates and by managing your total income to stay in a lower tax bracket.

Do I have to report small dividends under $10?

Yes. The IRS requires you to report all dividend income, no matter how small. Your brokerage reports it on Form 1099-DIV, and the IRS expects to see it on your return. Failing to report small amounts can trigger an audit.

What happens if I sell a stock right after the dividend is paid?

If you sell within 60 days of the ex-dividend date, the dividend is non-may have access to and taxed as ordinary income at your full tax bracket rate. This is why the IRS requires a 60-day holding period — to prevent investors from collecting dividends and immediately selling without holding the stock long-term.