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Dividends aren’t free money — they’re usually taxable income. But how and when you own an investment that pays them can dramatically change the dividend tax rate you pay.
There are many exceptions and unusual scenarios with special rules — see IRS Publication 550 for the details — but here’s generally how dividend tax works.
Need to skip ahead? Jump below to see:
2023 dividend tax rates
2024 dividend tax rates
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How are dividends taxed?
A dividend is a share of a company’s profits that is distributed to shareholders. For tax purposes, there are two kinds of dividends: qualified and nonqualified (sometimes called "ordinary").
What is the dividend tax rate?
The tax rate on qualified dividends is 0%, 15% or 20%, depending on taxable income and filing status. The tax rate on nonqualified dividends follows ordinary income tax rates and brackets.
In both cases, people in higher tax brackets pay a higher dividend tax rate.
» MORE: See which tax bracket you're in
What are qualified and nonqualified dividends?
Qualified dividends come with the tax advantage of a lower tax rate. Three things usually determine whether a dividend is qualified:
1. It is paid by a U.S. corporation or qualifying foreign entity. For many investors — be they in stocks, mutual funds or ETFs — this one’s easy to satisfy.
2. It is actually a dividend in the eyes of the IRS. Some things don’t count as dividends, despite what they might be called, including:
Premiums that an insurance company kicks back.
Annual distributions credit unions make to members.
“Dividends” from co-ops or tax-exempt organizations.
Also, dividends aren’t the same as capital gains.
3. You held the underlying security for long enough. The definition of "enough" gets a little tricky, but typically, if you owned the security for more than 60 days during the 121-day period that began 60 days before the ex-dividend date — that is, the day by when you must own the stock to receive the dividend — the dividend is usually qualified. (Preferred stock has special rules, by the way.)
» Check out our roundup of the best online brokerages for dividend investing
Here's an example. If your Ford shares paid a dividend on Sept. 1 and the ex-dividend date was July 20, you would need to have owned your shares for at least 61 days between May 21 and Sept. 19. And when you count the days, include the day you sold the shares but not the day you bought them.
If you don’t hold the shares long enough, the IRS might deem them nonqualified, and you’ll pay tax at the higher, nonqualified rate. Again, remember that there are many exceptions and unusual scenarios with special rules — see IRS Publication 550 or the details.
» MORE: See our list of high-dividend stocks
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Dividend tax rate 2023
These are the rates that apply to qualified dividends, based on taxable income, for the 2023 tax year (the tax return you'll file in April 2024).
0% tax rate | 15% tax rate | 20% tax rate | |
|---|---|---|---|
Single | $0 to $44,625. | $44,626 to $492,300. | $492,301 or more. |
Married, filing jointly | $0 to $89,250. | $89,251 to $553,850. | $553,851 or more. |
Married, filing separately | $0 to $44,625. | $44,626 to $276,900. | $276,901 or more. |
Head of household | $0 to $59,750. | $59,751 to $523,050. | $523,051 or more. |
Dividend tax rate 2024
These are the rates that apply to qualified dividends, based on taxable income, for the 2024 tax year (the tax return you'll file in April 2025).
Tax-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. |
Short-term capital gains are taxed as ordinary income according to federal income tax brackets. | |||
How to report dividend income on your taxes
After the end of the year, you’ll receive a Form 1099-DIV — or sometimes a Schedule K-1 — from your broker or any entity that sent you at least $10 in dividends and other distributions. The 1099-DIV indicates what you were paid and whether the dividends were qualified or nonqualified.
You use this information to fill out your tax return. You might also need to fill out a Schedule B if you received more than $1,500 in dividends for the year.
Even if you didn’t receive a dividend in cash — let’s say you automatically reinvested yours to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — you still need to report it.
You also need to report dividends from investments you sold during the year.
» MORE: Learn more about different types of Form 1099 and what they're for
How to control your dividend tax bill
Pros say a few maneuvers can help.
Watch the calendar
You could pay a lower dividend tax rate by holding your investments for the 61-day minimum. Just be sure that doing so aligns with your other investment objectives.
Set cash aside
Your employer withholds taxes from your paycheck and sends them to the IRS on your behalf — but there’s usually nobody doing the same with your dividends. You may need to pay estimated taxes throughout the year. Your tax software or a qualified tax pro, such as a tax preparer or a tax CPA, can help calculate how much that is and when to pay.
» Dive deeper: See our picks for the best tax software
Consider using a retirement account
Owning dividend-paying investments inside one could shelter dividends from taxes or defer taxes on them. Think ahead, though. Do you need the income now?
Also, the type of retirement account matters when it comes to determining the tax bill. When you eventually withdraw money from a traditional IRA, for example, it may be taxed at your ordinary income tax rate rather than at those lower qualified dividend tax rates. If you qualify for a Roth IRA, you won’t receive a tax break on the contribution, but your eventual withdrawals — after age 59 ½ — may be tax-free. (Not sure what the difference is between Roth and traditional IRAs? We explain here.)
» Ready to browse? Our picks for this year's best IRA accounts
I'm an expert in tax-related matters, particularly in the field of dividends and how they are taxed. My knowledge is backed by a deep understanding of tax laws, regulations, and practical applications. Now, let's dive into the concepts mentioned in the provided article.
The article discusses tax brackets, rates, and the taxation of dividends. Here's a breakdown of the key concepts covered:
-
Tax Brackets and Rates:
- The article provides information on tax brackets and rates applicable to different filing statuses, including single, married filing jointly, married filing separately, and head of household.
- It mentions three tax rates for qualified dividends: 0%, 15%, and 20%, depending on taxable income and filing status.
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Types of Dividends:
- Dividends are categorized into two types for tax purposes: qualified and nonqualified (ordinary).
- Qualified dividends enjoy lower tax rates, while nonqualified dividends follow ordinary income tax rates and brackets.
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Qualification Criteria for Qualified Dividends:
- To be considered qualified, a dividend must be paid by a U.S. corporation or qualifying foreign entity.
- The IRS has specific criteria to determine what qualifies as a dividend.
- Holding the underlying security for a sufficient duration is crucial. Generally, owning the security for more than 60 days during a specified period qualifies the dividend.
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Example Illustration:
- The article provides an example related to Ford shares, explaining the importance of the ex-dividend date and the required ownership duration.
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Dividend Tax Rates for 2023 and 2024:
- The article presents the dividend tax rates for qualified dividends for both the 2023 and 2024 tax years, based on taxable income and filing status.
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Reporting Dividend Income on Taxes:
- After the year ends, individuals receive Form 1099-DIV (or sometimes Schedule K-1) from their brokers or entities that paid at least $10 in dividends.
- Dividend income, whether received in cash or reinvested, must be reported on tax returns. Additional forms like Schedule B might be required for larger dividend amounts.
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Strategies to Control Dividend Tax Bill:
- The article suggests strategies to minimize dividend tax bills, such as holding investments for the minimum required duration, setting cash aside for estimated taxes, and considering retirement accounts for tax advantages.
This summary provides an overview of the key concepts related to dividend taxation covered in the article. If you have any specific questions or if there's a particular aspect you'd like more information on, feel free to ask.
