Yes, you pay tax on most dividends, but the rate depends on the type of dividend and how long you held the stock

Dividends are taxed as income by the IRS. The amount you owe depends on whether the dividend is may have access to or ordinary. may have access to dividends — paid by U.S. corporations or may have access to foreign companies on stock you held for more than 60 days — are taxed at the long-term capital gains rate, which is lower than ordinary income tax rates. Ordinary dividends are taxed at your regular income tax rate, which can be significantly higher.

You report dividends on your federal tax return whether you reinvest them or take them as cash. The company that paid the dividend sends you a Form 1099-DIV by January 31, and you use that form to report the income. State taxes may also apply, depending on where you live.

Key Takeaways

  • may have access to dividends are taxed at long-term capital gains rates (0%, 15%, or 20%), while ordinary dividends are taxed at your regular income tax bracket (up to 37%).
  • 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 around the dividend payment date.
  • You receive a Form 1099-DIV from the company that paid the dividend, and you report all dividend income on your federal tax return.
  • Dividends held in retirement accounts like 401(k)s and IRAs are not taxed until you withdraw the money, and some withdrawals may not be taxed at all.

The difference between may have access to and ordinary dividends

The IRS taxes may have access to and ordinary dividends at different rates. may have access to dividends are taxed at the long-term capital gains rate: 0%, 15%, or 20%, depending on your income level. Ordinary dividends are taxed at your marginal income tax rate, which ranges from 10% to 37% in 2024.

For a dividend to be may have access to, two conditions must be met. First, the company paying it must be a U.S. corporation or a may have access to foreign corporation (generally one traded on a U.S. exchange). Second, you must have owned the stock for more than 60 days during a 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the cutoff — if you buy the stock on or after that date, you do not receive that dividend.

If you do not meet the holding period, the dividend is taxed as ordinary income. This matters most for investors who trade frequently or hold stocks for short periods. If you hold a stock for years, nearly all dividends will be may have access to.

How to report dividends on your tax return

The company that paid you dividends sends a Form 1099-DIV by January 31. This form shows the total amount of ordinary dividends, may have access to dividends, and any other distributions. You use this form to fill out Schedule B (Interest and Ordinary Dividends) or Schedule 1 (Additional Income), depending on the total amount and type of income you received.

If your total dividends and interest are $1,500 or less, you can report them directly on your Form 1040 without filing Schedule B. If you have more than $1,500, you must file Schedule B and list each dividend-paying company separately. may have access to dividends go on a separate line from ordinary dividends so they are taxed at the correct rate.

You report dividends even if you reinvested them back into the company or fund. Reinvestment does not change the tax treatment — you still owe tax on the full amount in the year you received it, not when you eventually sell the shares.

Dividends in retirement accounts and tax-deferred investments

Dividends earned inside a 401(k), traditional IRA, or Roth IRA are not taxed in the year you receive them. The tax treatment depends on the account type. In a traditional 401(k) or IRA, dividends grow tax-free, but you pay ordinary income tax on the full amount when you withdraw it in retirement. In a Roth IRA, dividends grow tax-free and may have access to withdrawals are not taxed at all.

This is one reason retirement accounts are valuable for dividend investors. You avoid paying tax every year on reinvested dividends and can let the money compound without the tax drag. The trade-off is that you cannot access the money before age 59½ without penalties (with some exceptions), and you must follow withdrawal rules in retirement.

Dividends in taxable brokerage accounts do not get this benefit. You owe tax on them every year, regardless of whether you sell the shares or reinvest the dividends.

State and local taxes on dividends

Most states tax dividend income as part of your regular state income tax. The rate varies by state — some states have no income tax at all, while others tax dividends at rates up to 13%. A few states, like Tennessee and New Hampshire, tax only dividend and interest income, not wages.

Some cities also impose local income taxes that apply to dividends. New York City, for example, taxes dividend income at rates up to 3.876%. You report state and local taxes on your state return, using the same Form 1099-DIV you filed with your federal return.

If you moved during the year or received dividends from stocks in multiple states, the rules can get complicated. Most states tax dividends based on where you lived when you received them, but some have other rules. A tax professional can help if your situation is complex.

Tax-loss harvesting and dividend income

Tax-loss harvesting is a strategy where you sell a losing investment to offset capital gains or other income. If you use this strategy with dividend-paying stocks, be aware of the wash-sale rule. If you sell a stock at a loss and buy the same stock (or a substantially identical one) within 30 days before or after the sale, the IRS disallows the loss. The holding period for dividends can also reset if you buy back the same stock.

This matters because you might sell a dividend stock to lock in a loss, but then buy it back before the ex-dividend date for the next dividend. The wash-sale rule prevents you from claiming the loss, and you still owe tax on the dividend. Plan the timing carefully if you use this strategy, or work with a tax professional to avoid unintended consequences.

How dividend income affects other parts of your taxes

Dividend income can push you into a higher tax bracket, which affects not just the dividends themselves but potentially your other income too. It can also trigger the Net Investment Income Tax (NIIT), a 3.8% additional tax on investment income for high earners. If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you may owe NIIT on some or all of your dividend income.

Dividend income also counts toward your modified adjusted gross income for purposes of Medicare premiums. Higher income can result in higher premiums for Medicare Part B and Part D. If you are close to an income threshold, timing when you receive or reinvest dividends might help, though this requires careful planning with a tax professional.

Frequently Asked Questions

Do I owe tax on dividends if I reinvest them?

Yes. Reinvestment does not change the tax treatment. You owe tax on the full dividend amount in the year you received it, even if you used the money to buy more shares instead of taking it as cash. The IRS taxes the dividend based on when it was paid, not when you eventually sell the shares.

What if I received a dividend but sold the stock before the ex-dividend date?

You do not receive the dividend if you sold before the ex-dividend date. The new owner receives it instead. If you sold at a loss, you cannot use that loss to offset the dividend tax because you did not owe tax on a dividend you never received.

Are foreign dividends taxed differently?

Foreign dividends are generally taxed the same way as U.S. dividends — as may have access to or ordinary income depending on the holding period and company type. However, some foreign countries withhold taxes on dividends before you receive them. You may be able to claim a foreign tax credit on your U.S. return to avoid double taxation. A tax professional can help if you hold significant foreign investments.

Do I have to report dividends under $10?

Yes. You must report all dividend income on your tax return, even small amounts. The company may not send you a Form 1099-DIV if the total is under $10, but you still owe tax on it. Keep records of all dividends you receive, regardless of size.