The core difference: tax rate and holding period

Ordinary dividends are taxed as regular income at your marginal tax rate — the same rate you pay on wages or salary. may have access to dividends are taxed at a lower rate: either 0%, 15%, or 20%, depending on your total income for the year. The difference between them comes down to how long you held the stock and what kind of company paid it.

When you receive a dividend from a mutual fund, ETF, or individual stock, your brokerage will report it to you and the IRS on a Form 1099-DIV. That form separates ordinary dividends from may have access to dividends in two different boxes. The IRS taxes each category differently, which means the same $1,000 in dividends can cost you $150 in taxes or $370 in taxes depending on which box it lands in.

This is not a choice you make. The classification depends on the type of dividend paid and how long you owned the shares before the payment date. Understanding which dividends you hold matters because it directly affects your tax bill.

Key Takeaways

  • Ordinary dividends are taxed as ordinary income at your full marginal rate, while may have access to dividends receive preferential rates of 0%, 15%, or 20%.
  • To may have access to for the lower rate, you must have held the stock for more than 60 days during the 121-day window centered on the ex-dividend date.
  • Most dividends from U.S. corporations and certain foreign corporations are may be able to access to be may have access to; dividends from REITs, master limited partnerships, and money market funds are typically ordinary.
  • Your tax bracket determines which may have access to dividend rate you pay: lower-income filers may pay 0%, middle-income filers 15%, and higher-income filers 20%.

What counts as an ordinary dividend

An ordinary dividend is any dividend that does not meet the holding-period requirement for may have access to status. This includes dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), money market funds, and certain foreign corporations. It also includes any dividend from a U.S. corporation or may have access to foreign corporation where you did not hold the shares long enough.

Ordinary dividends are also called non-may have access to dividends. They are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your filing status and total taxable income. If you are in the 24% tax bracket, a $1,000 ordinary dividend costs you $240 in federal income tax. If you are in the 37% bracket, it costs you $370.

Some dividends are ordinary by nature, regardless of how long you hold them. REIT dividends, for example, are almost always ordinary because REITs are required to distribute most of their income to shareholders and are taxed differently than regular corporations. The same applies to dividends from partnerships and S-corporations.

What counts as a may have access to dividend

A may have access to dividend comes from a U.S. corporation or a may have access to foreign corporation, and you must have held the shares for more than 60 days during a 121-day window. The window starts 60 days before the ex-dividend date — the date after which new buyers do not receive the upcoming dividend — and ends 60 days after it.

The holding period is strict. If you bought the stock 59 days before the ex-dividend date and sold it 2 days after, you do not meet the requirement. If you held it through the ex-dividend date but sold it before the 60-day window closed, you do not may have access to. The brokerage does not make exceptions, and neither does the IRS.

may have access to dividends are taxed at preferential rates: 0% if your taxable income falls below the threshold for your filing status, 15% for most middle-income filers, and 20% for high-income filers. For 2024, the 15% rate applies to single filers with taxable income between roughly $47,000 and $518,000, and to married filers filing jointly between roughly $94,000 and $583,000. These thresholds change each year.

How the holding-period rule works in practice

The 121-day window is centered on the ex-dividend date, not the payment date. If a company declares a dividend with an ex-dividend date of June 15, the window runs from April 16 to August 14. You must hold the stock for more than 60 days within that window to may have access to.

If you bought the stock on May 1 and the ex-dividend date is June 15, you have held it for 45 days by the ex-dividend date. You would need to hold it until at least August 14 to reach 60 days in the window. If you sell on August 13, you fall one day short and the dividend becomes ordinary.

Certain transactions reset or interrupt your holding period. If you sell covered calls or buy protective puts on the stock, the holding period may be suspended for those days. If you sell short an identical or substantially identical security, the holding period stops. These rules exist to prevent investors from claiming the may have access to rate while hedging away the risk of ownership.

Tax brackets and the may have access to dividend rates

The tax rate you pay on may have access to dividends depends on your total taxable income, not on the dividend amount alone. The IRS uses three tiers: 0%, 15%, and 20%. Your income determines which tier you fall into, and all your may have access to dividends are taxed at that rate.

The 0% rate is available to single filers with taxable income up to roughly $47,000 and married filers filing jointly up to roughly $94,000 in 2024. This rate is valuable because it means may have access to dividends in this range cost you nothing in federal income tax. The 15% rate applies to the next income tier, and the 20% rate applies to the highest earners.

If your may have access to dividends push you into a higher bracket, only the dividends above the threshold are taxed at the higher rate. This is called stacking. If you are a single filer with $45,000 in ordinary income and $5,000 in may have access to dividends, the first $2,000 of dividends falls in the 0% bracket and the remaining $3,000 falls in the 15% bracket.

Why the difference matters for your tax bill

The tax savings from may have access to dividends can be substantial. A $10,000 may have access to dividend taxed at 15% costs $1,500 in federal tax. The same $10,000 as an ordinary dividend in the 24% bracket costs $2,400 — a difference of $900. Over years of investing, this gap compounds.

This is why holding periods matter. If you are tempted to sell a stock shortly after the ex-dividend date, you may lose the may have access to rate on that dividend. The tax cost of selling early can exceed any gain from redeploying the money elsewhere. Before you sell, calculate whether the may have access to rate is worth holding for the remaining days in the window.

The difference also affects your overall tax planning. If you are near the edge of a tax bracket, receiving ordinary dividends instead of may have access to ones could push you into a higher bracket and affect your Medicare premiums, your net investment income tax, or your ability to claim certain deductions. Knowing which dividends you hold helps you anticipate these effects.

Common sources of ordinary dividends

REITs are the most common source of ordinary dividends for individual investors. A REIT must distribute at least 90% of its taxable income to shareholders, and that income is taxed as ordinary income. Even if you hold the REIT for years, the dividends remain ordinary. This does not make REITs a bad investment, but it means the tax cost is higher than it would be for a stock dividend.

Master limited partnerships (MLPs) also pay ordinary dividends. These are typically energy infrastructure companies, and their distributions are taxed as ordinary income. Additionally, money market funds, bond funds, and preferred stock dividends are usually ordinary. Some foreign corporations do not may have access to for the preferential rate either, depending on tax treaties and the company's country of incorporation.

If you own mutual funds or ETFs, your year-end statement will break down which portion of your dividends are may have access to and which are ordinary. The fund manager has already done the holding-period tracking for you. If you own individual stocks, your brokerage will report this on your 1099-DIV.

Frequently Asked Questions

Can I lose the may have access to dividend rate if I sell the stock before the dividend is paid?

Yes. The payment date does not matter — only the ex-dividend date and your holding period around it. If you sell before you have held the stock for 60 days in the 121-day window, the dividend is ordinary, even if you sell after the ex-dividend date but before the company pays out the cash.

Do I have to do anything to claim the may have access to dividend rate on my tax return?

No. Your brokerage reports may have access to and ordinary dividends separately on your 1099-DIV, and tax software reads that form automatically. The IRS knows which rate applies based on the form your brokerage files. You do not need to prove your holding period unless the IRS audits you.

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

Your holding period for the original shares is what matters. If you bought 100 shares and held them for 61 days through the ex-dividend date, those shares generate a may have access to dividend. If the DRIP automatically bought new shares with that dividend, the new shares start their own 121-day window for future dividends.

Are foreign dividends ever may have access to?

Yes, but only from corporations in countries with which the U.S. has a tax treaty. Dividends from most major developed countries may have access to if you meet the holding-period requirement. Dividends from some emerging markets and countries without a treaty are ordinary. Your 1099-DIV will specify which dividends are may have access to.

If I am in the 0% may have access to dividend bracket, should I prioritize buying dividend stocks?

Not necessarily. The 0% rate is valuable, but it applies only to may have access to dividends within that income range. Once your income exceeds the threshold, may have access to dividends are taxed at 15%. Focus on total return and diversification first, and let the tax treatment be a secondary consideration.