Dividends can be a great way to earn passive income from your investments, but understanding how they’re taxed is essential to making the most of them. Whether you’re reinvesting your dividends or using them as a source of income, taxes can impact your overall returns.
In this guide, we’ll break down how dividends are taxed, the differences between qualified and ordinary dividends, and what it means for your tax bracket. By the end, you’ll have a clear understanding of what to expect at tax time and how to plan your investments more effectively.
What is the dividend tax rate?
When you become a stakeholder in a company, you receive a percentage of that company’s profit. These distributions are called dividends. As a shareholder, you must pay taxes on these dividends, but the tax rate on your dividends will depend on how those earnings are classified.
Different types of dividends are taxed at different rates. The dividend tax rate ranges from 0% to 37%, depending on the kind of dividend and your tax bracket.
Types of dividends: Qualified vs. Nonqualified
In the United States, the IRS categorizes dividend stocks into two types: qualified dividends and nonqualified (ordinary) dividends. These categories differ primarily in their tax treatment and the requirements they must meet. Here’s a closer look at both:
What are qualified dividends?
Qualified dividends are taxed at the lower long-term capital gains rates (0%, 15%, or 20%), making them more tax-advantageous. To be considered qualified, dividends must meet the following criteria:
- Issuer requirement: Must be paid by a U.S. corporation or a qualified foreign corporation listed on major exchanges like the Dow Jones or Nasdaq.
- Holding period: The stock must be held for at least 61 continuous days during the 121-day holding period that begins 60 days before the ex-dividend date.
What are nonqualified (ordinary) dividends?
Nonqualified dividends, often referred to as ordinary dividends, do not meet the IRS requirements to be classified as qualified. These are taxed at regular income tax rates (10% to 37%), which may result in higher taxes for investors.
Examples of dividends that do not qualify
Some dividends are automatically classified as nonqualified because of the following:
- Dividends paid by tax-exempt organizations.
- Dividends from real estate investment trusts (REITs).
- Dividends issued by foreign corporations that do not meet the IRS’s qualifications.
- Most distributions from common and preferred stocks do not meet the holding period requirements.
However, for tax purposes, investors face an advantage when they make money from qualified dividends: the qualified dividend tax rate is lower compared to the ordinary dividend tax rate.
How are dividends taxed?
Dividends are taxed based on their classification and your income tax bracket.
- Qualified dividends: Taxed at capital gains rates (0%, 15%, or 20% in 2024-2025).
- Nonqualified dividends: Taxed at ordinary income tax rates (10% to 37%).
If you’re a high-income earner, an additional 3.8% Net Investment Income Tax (NIIT) may apply to both types of dividends. This tax kicks in if your modified adjusted gross income (MAGI) exceeds $200,000 for single filers or $250,000 for married couples filing jointly.
Tax rates for qualified and ordinary dividends
For taxpayers, the split between qualified and ordinary dividends means there are two different possible tax rates on dividend income.
Ordinary dividends
- Taxation: Ordinary dividends are taxed at your ordinary income tax rate.
- Rate range: The specific rate varies based on your tax bracket and filing status, ranging from 10% to 37%.
- Details: These dividends are treated the same as most other forms of taxable income.
Qualified dividends
- Taxation: Qualified dividends are taxed at the same rate as long-term capital gains, often resulting in a lower tax rate.
- Rate range: The tax rate depends on your tax bracket and filing status:
- 0%, 15%, or 20% for most taxpayers.
- An additional 3.8% tax applies to high-income earners on their investment income, including qualified dividends.
Optimizing your portfolio
If you have investments across multiple platforms, consolidating them can simplify determining which dividends are qualified and which are ordinary.
Platforms like Public allow you to transfer your stock portfolio without selling shares, streamlining your portfolio and optimizing taxes.
2024 dividend tax rates
Qualified dividends, which meet specific IRS criteria, are taxed at lower rates:
- 0%: Single filers with taxable income up to $47,025 and married couples filing jointly up to $94,050.
- 15%: Single filers earning $47,026$518,900 and joint filers earning $94,051$583,750.
- 20%: For taxable incomes above $518,900 (single) and $583,750 (joint).
Nonqualified dividends, on the other hand, are taxed as ordinary income based on your income tax bracket, which ranges from 10% to 37%
2025 dividend tax rates
Qualified dividends will follow slightly adjusted brackets due to inflation:
- 0%: Single filers with taxable income up to $48,350 and married couples filing jointly up to $96,700.
- 15%: Single filers earning $48,351$533,400 and joint filers earning $96,701$600,050.
- 20%: For incomes exceeding $533,400 (single) and $600,050 (joint).
Nonqualified dividends remain taxed as ordinary income. For both years, short-term capital gains (dividends from shares held less than 60 days) also follow these higher rates.
How to report dividend income on your taxes?
To report dividend income on your taxes, you’ll need to follow these steps:
- Collect your Form 1099-DIV: This form shows the total dividends earned and whether they’re qualified or ordinary.
- Report on your tax return: Use Schedule B if dividends exceed $1,500, or report them directly on Form 1040.
- Classify the dividends: Determine if they are “qualified” (taxed at lower rates) or “ordinary” (taxed at regular income rates).
- Include foreign dividends: If applicable, claim a foreign tax credit for any foreign taxes withheld.
Using tax software or consulting a tax professional can simplify this process if you’re unsure.
The bottom line
Dividends are one of the rewarding benefits of long-term investing, but they’re taxed like any other form of income. If you’re looking to grow your wealth over time, Public offers a platform that lets you build a multi-asset portfolio, including stocks, options, bonds, and more. With tools like the Income Hub to track earnings from your dividend-paying assets and Alpha, an AI-powered assistant, you can stay on top of your investments and make informed decisions.
Join Public today and start investing with a platform designed for serious investing.
Frequently asked questions
What income is taxable for dividends?
All dividends are taxable, though the rate depends on the type of dividend as well as your tax bracket and filing status. Dividends earned in tax-deferred accounts such as IRAs are not treated as taxable income, but you may be taxed when you make withdrawals from those accounts depending on your circumstances.
Are dividends taxed twice?
Dividends are taxed either at the capital gains rate or at your ordinary income tax rate.
Is the dividend tax rate always the same?
No, the dividend tax rate depends on whether your dividends are qualified or non-qualified.
How do I minimize paying tax on dividends?
Tax-loss harvesting can be used to offset gains from ordinary income, including dividends.
Do I owe taxes on dividends?
Not all investments generate dividends, even if they are in major U.S. corporations. If you earn dividends exceeding $10 in a tax year, your brokerage will send you a Form 1099-DIV, indicating the dividend income.
What is the reporting requirement for dividend income?
If your total dividends exceed $1,500, you must report them on the Schedule B form of your tax return. You’ll then pay taxes on the dividends, classified as either qualified or ordinary dividends.
