How Dividends Are Taxed: What You Owe and When You Pay It

Dividends are taxed as income, but the rate depends on whether they are ordinary or may have access to

Ordinary dividends are taxed at your regular income tax rate — the same rate as your salary or wages. may have access to dividends are taxed at a lower rate: 0%, 15%, or 20%, depending on your total income for the year. Most dividends from U.S. stocks held in regular accounts are may have access to, which means you pay less tax on them than on ordinary income.

The tax bill arrives when you file your annual return, not when you receive the dividend. Your brokerage sends you a Form 1099-DIV in January showing how much you received and which type it was. You report that on your tax return and pay what you owe (or get a refund if too much was withheld).

Dividends in retirement accounts like 401(k)s and IRAs are not taxed at all while the money sits in the account. You pay tax only when you withdraw the money, and the rate depends on the account type and your age.

Key Takeaways

• may have access to dividends from U.S. stocks are taxed at 0%, 15%, or 20% depending on your income bracket, while ordinary dividends are taxed at your regular income tax rate.
• Your brokerage reports all dividends on Form 1099-DIV, which you receive in January and use to file your tax return.
• Dividends in 401(k)s and traditional IRAs are not taxed while in the account; you pay tax when you withdraw the money.
• Dividends in Roth IRAs and Roth 401(k)s are never taxed, even when you withdraw them, if you follow the account rules.
• Holding a stock for at least 60 days around the dividend payment date is required for the dividend to count as may have access to.

may have access to versus ordinary dividends

A may have access to dividend comes from a U.S. corporation or a foreign corporation whose stock trades on a U.S. exchange. It must also meet a holding period: you need to own the stock for at least 60 days during the 121-day window centered on the ex-dividend date (the date the dividend is deducted from the stock price). Most dividends from stocks you buy and hold meet this test.

An ordinary dividend is any dividend that does not meet the may have access to rules. This includes dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and some foreign stocks. It also includes dividends from stocks you held for fewer than 60 days. Ordinary dividends are taxed as regular income at rates ranging from 10% to 37%, depending on your tax bracket.

Your brokerage automatically sorts this for you. On your Form 1099-DIV, may have access to dividends appear in Box 1b and ordinary dividends in Box 1a. You do not have to calculate which is which.

Tax rates for may have access to dividends

may have access to dividends are taxed at one of three rates: 0%, 15%, or 20%. The rate you pay depends on your taxable income for the year, not on how much dividend income you received. The income thresholds change each year.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025 and married filers filing jointly up to $94,050. The 15% rate applies to income above those amounts up to $518,900 (single) or $583,750 (married filing jointly). Anything above that is taxed at 20%. These numbers are adjusted annually for inflation.

This means a person in the 0% bracket pays no federal tax on may have access to dividends, even though they may pay income tax on wages. A person in the 15% bracket pays 15% on dividends but may pay 22% or 24% on wages, so dividends are taxed at a lower rate. Someone in the top income bracket pays 20% on dividends but 37% on wages.

How dividends are reported and when you pay tax

Your brokerage sends Form 1099-DIV to you and to the IRS by January 31 each year. The form shows total dividends received, broken down by type. You report this on your tax return (Form 1040, Schedule B if you received more than $1,500 in dividends, or Schedule 1 if less). You calculate the tax owed based on your total income and file by April 15.

Most brokerages withhold a small amount of tax from each dividend payment — usually 10% for ordinary dividends if you did not provide a tax ID. This withholding is credited against your final tax bill. If too much was withheld, you get a refund. If too little was withheld, you owe the difference when you file.

You do not have to pay quarterly estimated taxes on dividends unless you expect to owe more than $1,000 when you file. Most individual investors simply report the total on their annual return.

Dividends in tax-deferred retirement accounts

Dividends inside a traditional 401(k) or traditional IRA are not taxed while they sit in the account. The money grows without any annual tax bill. You pay tax only when you withdraw it, and the entire withdrawal is taxed as ordinary income at your regular rate.

This is different from holding stocks in a regular brokerage account, where you owe tax on dividends each year even if you do not sell the stock. In a retirement account, you defer all tax until withdrawal, which can be a significant advantage if you reinvest the dividends and let them compound for decades.

The tradeoff is that withdrawals from traditional accounts are taxed as ordinary income, not at the lower may have access to dividend rate. If you withdraw $50,000 from a traditional IRA, the entire amount is taxed at your regular rate, even if it came from may have access to dividends.

Dividends in Roth accounts

Dividends in a Roth IRA or Roth 401(k) are never taxed, either while in the account or when you withdraw. This is the biggest tax advantage of a Roth account. You pay tax on the money when you contribute it, but after that, all growth and all dividends are tax-free forever.

The catch is that you can only withdraw the earnings (including dividends) tax-free if you are age 59½ or older and have held the account for at least five years. If you withdraw earnings before then, you pay tax on the earnings plus a 10% penalty. You can always withdraw your contributions without tax or penalty.

For this reason, Roth accounts are especially valuable for dividend stocks. If you buy a dividend-paying stock in a Roth IRA and hold it for 30 years, you never pay tax on any of the dividends or the growth.

State and local taxes on dividends

Most states tax dividend income as regular income at their state income tax rate. A few states do not tax dividends at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. New Hampshire and Tennessee tax only dividend and interest income, not wages.

If you live in a state with income tax, you will owe state tax on dividends in addition to federal tax. The state tax rate varies from about 1% to 13% depending on the state and your income bracket. Your brokerage does not withhold state tax, so you may need to account for it when you file your state return or make estimated payments.

Dividends in retirement accounts are generally not subject to state tax while in the account, just like federal tax. When you withdraw, state tax applies the same way federal tax does.

Frequently Asked Questions

Do I owe tax on dividends I reinvest?

Yes. If your brokerage automatically reinvests dividends into new shares, you still owe tax on the full dividend amount in the year you received it. The fact that you did not take the cash out does not change the tax. Report the dividend on your tax return and pay tax on it, even though the money stayed in your account.

What if I sell a stock right after the ex-dividend date?

If you sell before holding the stock for 60 days around the ex-dividend date, the dividend is taxed as ordinary income instead of may have access to. This can happen if you buy a stock just before the ex-dividend date to capture the dividend and then sell it. The IRS has rules to prevent this strategy, and your brokerage tracks the holding period automatically.

Are foreign dividends taxed differently?

Foreign dividends are usually taxed as ordinary income unless they come from a foreign corporation whose stock trades on a U.S. exchange and you meet the holding period. Some countries withhold tax on dividends paid to U.S. citizens, and you may be able to claim a foreign tax credit on your U.S. return to avoid double taxation. Consult a tax professional if you own foreign stocks.

Do I need to report dividends under $10?

Yes. You must report all dividends on your tax return, no matter how small. Your brokerage will report them on Form 1099-DIV, and the IRS will see the same amount. Failing to report small dividends can trigger an audit notice.

What happens to dividends if I inherit stock?

If you inherit stock, you receive a "step-up in basis," meaning the cost basis is reset to the stock price on the date of death. Any dividends paid after you inherit are taxed to you as the new owner. Dividends paid before the death are taxed to the estate or the previous owner's final return.