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In most cases, dividend income is taxable. The tax rates that are applied to dividend income depend on the type of dividend you receive, your filing status, and your taxable income amount.
Taxpayers will usually receive Form 1099-DIV for all dividends in excess of $10 earned from any single entity. They must report this income on Schedule B of their Federal tax return if they’ve received over $1,500.
Some investment vehicles that issue dividends are exempt from taxes, as some mutual funds or other regulated investments may hold municipal or tax-exempt securities that yield nontaxable dividends. In addition, the lowest tax rate for qualified dividends is 0%.
Key Takeaways
- The tax rate for dividends depends on whether they are qualified or ordinary.
- Qualified dividends, which include those paid by U.S. companies, are taxed at the long-term capital gains rate.
- Ordinary, or nonqualified, dividends, are taxed at the ordinary income rate.
- Taxpayers will receive a Form 1099-DIV for dividends above $10. This form is also sent to the IRS on the taxpayer’s behalf.
- Taxpayers may need to complete Schedule B to support Form 1040 if they earn a certain amount of dividends.
Qualified and Ordinary Dividends
Qualified Dividends
A qualified dividend payment is taxed at one of three long-term capital gains tax rates instead of at the usually higher tax rate applied to an individual’s ordinary income. These lower tax rates are 0%, 15%, and 20%.
To be eligible for these special tax rates, a dividend must be qualified, which means it is paid by one of the following:
- A U.S. company
- A company in U.S. possession
- A foreign company residing in a country that is eligible for benefits under a U.S. tax treaty
- A foreign company whose stock can be easily traded on a major U.S. stock market
These dividends must also meet holding period requirements. That is, the stock must have been held in excess of 60 days during the 121-day period beginning 60 days before the ex-dividend date.
In the case of preferred stock, the stock must have been held in excess of 90 days during the 181-day period beginning 90 days before the ex-dividend date if the dividends are due in a period of time longer than 366 days.
Ordinary Dividends
Ordinary, or nonqualified, dividends do not meet the qualified dividend requirements and thus the income derived from them is treated as a short-term capital gain.
Therefore, ordinary dividends are taxed at the same rates as an individual’s regular income. You might receive ordinary dividends from real estate investment trusts (REITs).
Note that if a taxpayer’s taxable income is low enough, qualified dividend income is assessed a marginal tax rate of 0%.
Qualified Dividend Taxes
The amount of tax paid on qualified dividends depends on the taxpayer’s filing status and taxable income. Below a certain income threshold, qualified dividend income is tax free. At the other extreme, qualified dividend income is taxed at 20% for those who exceed the maximum allowed income threshold.
Have a look at the breakdown of the capital gains taxes on qualified dividends for the various filing statuses and income ranges for tax years 2024 and 2025:
| Capital Gains Tax Rates for Qualified Dividends for Tax Year 2024 | |||
|---|---|---|---|
| Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
| Single | $0 to $47,025 | $47,026 to $518,900 | $518,901 or more |
| Married Filing Jointly | $0 to $94,050 | $94,051 to $583,750 | $583,751 or more |
| Married Filing Separately | $0 to $47,025 | $47,026 to $291,850 | $291,851 or more |
| Head of Household | $0 to $63,000 | $63,001 to $551,350 | $551,351 or more |
| Capital Gains Tax Rates for Qualified Dividends for Tax Year 2025 | |||
|---|---|---|---|
| Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
| Single | $0 to $48,350 | $48,351 to $533,400 | $533,401 or more |
| Married Filing Jointly | $0 to $96,700 | $96,701 to $600,050 | $600,051 or more |
| Married Filing Separately | $0 to $48,350 | $48,351 to $300,000 | $300,001 or more |
| Head of Household | $0 to $64,750 | $64,751 to $566,700 | $566,701 or more |
How Much Do You Pay in Taxes for Dividends?
The ultimate tax rate a taxpayer pays on dividends depends on the taxpayer’s taxable income (and associated marginal tax rate) and the type of dividend received. Qualified dividends are assessed at capital gains tax rates up to a maximum rate of 20%. Some of these dividends may be taxed at a rate as low as 0%.
How Do I Avoid Paying Taxes on Dividends?
There are several strategies taxpayers can employ to avoid paying taxes on dividends. First, taxpayers can try to stay in lower tax brackets (for tax reasons). In addition, they can invest in tax-exempt securities. Last, investors may leverage tax-exempt accounts or tax-deferred accounts to at least defer taxes.
Do I Get Taxed on Dividends If I Reinvest Them?
Yes, you do. And the rate applied depends on whether the dividends are qualified or ordinary. Now, if you have a dividend reinvestment plan, your tax obligation might be only on the difference between the shares’ fair market value and the purchase price (typically less than market value).
The Bottom Line
Many investors seek additional cash flow by investing in dividend-issuing securities. Some securities are tax-exempt, while other types of dividends held within certain retirement accounts is non-taxable.
However, ordinary dividends are taxed at the ordinary income tax rate in accord with a taxpayer’s marginal tax bracket. Qualified dividends are taxed at capital gains tax rates, which normally range from 0% to 15% to 20%.