The core difference: your tax rate depends on which type you receive
Ordinary dividends are taxed as regular income at your full tax bracket rate — the same rate you pay on wages or salary. may have access to dividends get a lower tax rate that Congress set specifically for investment income. The difference can mean paying 15 or 20 percent tax instead of 24, 32, 35, or 37 percent, depending on your total income for the year.
The IRS does not decide which dividends are may have access to. The company paying the dividend decides, based on its legal structure and how long you held the stock. Your job is to know which type you received so you report it correctly on your tax return.
Most dividends from large U.S. corporations and many mutual funds are may have access to. Dividends from real estate investment trusts (REITs), master limited partnerships, and most bonds are ordinary. Your brokerage statement will label them separately, so you do not have to figure this out yourself — but understanding the difference helps you see why the tax bill looks the way it does.
Key Takeaways
- Ordinary dividends are taxed at your regular income tax rate, which ranges from 10 to 37 percent depending on your income level.
- may have access to dividends are taxed at 0, 15, or 20 percent depending on your total income, regardless of your regular tax bracket.
- The company paying the dividend determines the type; your brokerage statement will show which dividends are may have access to and which are ordinary.
- You must hold the stock for at least 60 days around the dividend payment date for the dividend to count as may have access to, even if the company qualifies.
- Dividends from REITs, bonds, and partnerships are almost always ordinary, while dividends from most U.S. corporation stocks are usually may have access to.
Why the tax rate matters: a concrete example
Suppose you are in the 24 percent tax bracket and receive $1,000 in ordinary dividends. You owe $240 in federal tax on that income. If those same $1,000 were may have access to dividends, you would owe $150 (at the 15 percent may have access to rate), saving $90.
The savings grow larger if you are in a higher bracket. Someone in the 37 percent bracket pays $370 on ordinary dividends but only $200 on may have access to ones — a $170 difference per $1,000 received. Over years of investing, this difference compounds.
This is why financial advisors mention may have access to dividends when discussing tax-efficient investing. It is not that may have access to dividends are "assistance programs" — you still pay tax — but the rate is substantially lower by design. Congress created this structure to encourage long-term stock ownership.
What makes a dividend may have access to: the holding period rule
Even if a company pays a may have access to dividend, you only get the lower tax rate if you held the stock long enough. You must own the shares for at least 60 days during the 121-day window that starts 60 days before the ex-dividend date (the date the company stops counting new buyers as dividend recipients).
This rule prevents people from buying stock right before a dividend payment, collecting the may have access to dividend, and selling immediately. If you do not meet the 60-day rule, the dividend becomes ordinary income in your hands, even though the company classified it as may have access to.
Your brokerage tracks this automatically. If you fall short of 60 days, they will report the dividend as ordinary on your tax forms. You do not have to calculate it yourself or contact the company.
Which investments almost always pay ordinary dividends
Real estate investment trusts (REITs) must distribute at least 90 percent of their taxable income to shareholders. By law, these distributions are taxed as ordinary income, not may have access to dividends, even though they come from real estate holdings.
Master limited partnerships (MLPs) and other partnership structures issue K-1 forms instead of 1099 forms. Their distributions are ordinary income. These are common in energy and infrastructure sectors.
Bond interest is always ordinary income, never may have access to. This includes interest from corporate bonds, government bonds, and bond mutual funds or ETFs.
Preferred stock dividends are usually ordinary unless the preferred stock is issued by a U.S. corporation and meets the holding period rule — then they can be may have access to. Check your brokerage statement or the fund prospectus to confirm.
Dividends from foreign corporations are ordinary income in the U.S. tax system, though you may be able to claim a foreign tax credit if the foreign country already taxed them.
How to find out which type you received
Your brokerage sends you a 1099-DIV form by January 31 each year. This form separates ordinary dividends (Box 1a) from may have access to dividends (Box 1b). If you use tax software, it often imports this data directly from your brokerage, so the dividends land in the right place on your return automatically.
If you manage multiple accounts or hold stocks through different brokerages, you will receive multiple 1099-DIV forms. Add up all the ordinary dividends across all forms, then add up all the may have access to dividends, and report each total on your tax return.
Your brokerage statement (the one you see online or receive monthly) also labels dividends as ordinary or may have access to when they are paid. This is useful for your own records and for checking against the 1099-DIV when it arrives.
What happens if you report them wrong
If you report ordinary dividends as may have access to, you are claiming a tax rate you do not deserve. The IRS matches your 1099-DIV against your return. If the numbers do not line up, they will either correct it and send you a bill, or flag it for review.
If you report may have access to dividends as ordinary, you pay more tax than you owe. The IRS will not correct this in your favor automatically — you have to catch it and file an amended return (Form 1040-X) to get the refund.
Most people do not make this mistake because tax software reads the 1099-DIV directly. But if you are filing by hand or using an older version of software, double-check that you are putting each type in the right box on Schedule B or Schedule D.
may have access to dividend rates change based on your income bracket
The tax rate on may have access to dividends is not a flat 15 percent for everyone. It depends on your total taxable income for the year and your filing status.
| Filing Status | 0% Rate (up to) | 15% Rate (up to) | 20% Rate (above) |
|---|---|---|---|
| Single | $47,025 | $518,900 | $518,900 |
| Married Filing Jointly | $94,050 | $583,750 | $583,750 |
| Head of Household | $62,700 | $551,350 | $551,350 |
These income thresholds change each year with inflation. If your total income falls in the lowest bracket, your may have access to dividends are taxed at 0 percent. If it falls in the middle bracket, they are taxed at 15 percent. If your income exceeds the top threshold, they are taxed at 20 percent.
This is why some people with modest incomes can receive may have access to dividends tax-free. It is also why high-income earners see may have access to dividends taxed at 20 percent instead of their regular 37 percent rate — still a significant savings, but not as dramatic as the 0 percent rate for lower earners.
Frequently Asked Questions
Can I choose to report may have access to dividends as ordinary to lower my tax bracket?
No. The IRS requires you to report dividends in the category the company assigned them. You cannot reclassify them to change your tax outcome. If you want to reduce your taxable income, you would need to use other strategies like contributing to retirement accounts or harvesting investment losses.
If I sell the stock before the ex-dividend date, do I still get the may have access to rate?
No. You must own the stock on the ex-dividend date to receive the dividend at all. If you sell before that date, you do not receive the dividend, so the holding period rule does not apply — there is nothing to report.
Are dividends from index funds and ETFs usually may have access to or ordinary?
Most index funds and ETFs that track U.S. stock indexes pay may have access to dividends, because they hold stocks from large U.S. corporations. Bond ETFs and international stock ETFs pay ordinary dividends. Check the fund's prospectus or your brokerage statement to confirm for the specific fund you own.
What if I inherit stock and receive a dividend shortly after?
You do not meet the 60-day holding period rule, so the dividend is ordinary income in your hands. The holding period clock starts when you inherit the stock, not when the previous owner bought it. However, you receive a "step-up" in basis when you inherit, which can reduce your capital gains tax if you later sell.
Do I have to pay state income tax on may have access to dividends at the lower rate too?
No. The may have access to dividend rate applies only to federal income tax. Most states tax all dividends as ordinary income at your regular state tax rate. A few states (like Alaska and Texas) have no income tax at all. Check your state's tax rules for the specific treatment in your location.