Yes, most dividends are taxable income

Dividends you receive from stocks, mutual funds, or exchange-traded funds (ETFs) are taxable to you in the year you receive them. The IRS treats them as income, and you report them on your tax return. The amount of tax you owe depends on what type of dividend it is and how long you held the investment.

You will receive a Form 1099-DIV from your brokerage or fund company by January 31 each year, listing all the dividends paid to you in the previous year. This form tells you which dividends are ordinary and which are may have access to — a distinction that matters for your tax bill.

Key Takeaways

  • Ordinary dividends are taxed at your regular income tax rate, which can be as high as 37 percent depending on your income level.
  • may have access to dividends receive preferential tax treatment and are taxed at 0, 15, or 20 percent depending on your total income for the year.
  • You must hold a stock for at least 60 days around the dividend payment date for the dividend to count as may have access to.
  • Dividends held in retirement accounts like 401(k)s and IRAs are not taxed in the year you receive them.
  • The Form 1099-DIV your brokerage sends you shows which dividends are ordinary and which are may have access to.

The difference between ordinary and may have access to dividends

An ordinary dividend is taxed as regular income. This includes dividends from real estate investment trusts (REITs), preferred stock dividends that do not meet the holding period, and dividends from most bond funds. Ordinary dividends are added to your other income and taxed at your marginal tax rate — the rate that applies to your highest dollar of income.

A may have access to dividend is taxed at a lower rate. To be may have access to, the dividend must come from a U.S. company or a foreign company whose stock trades on a U.S. exchange, and you must have held the stock for at least 60 days during the 121-day window centered on the ex-dividend date. If you meet these conditions, your dividend is taxed at either 0, 15, or 20 percent, depending on your taxable income for the year.

Your brokerage will tell you on the Form 1099-DIV which dividends are may have access to and which are ordinary. You do not have to calculate this yourself.

How the holding period works

The IRS requires you to hold the stock for at least 60 days out of a 121-day period centered on the ex-dividend date — the date the company stops paying the dividend to new buyers. This means you must own the stock both before and after the ex-dividend date to get the preferential tax rate.

If you buy a stock the day before the ex-dividend date and sell it the day after, the dividend will not be may have access to, even if you receive it weeks later. The holding period is about when you owned the shares, not when you received the payment.

This rule prevents investors from buying a stock just to collect a dividend and then selling it when ready. If you hold the stock for a short time around the ex-dividend date, the dividend reverts to ordinary status.

Dividends in taxable versus tax-advantaged accounts

Dividends held in a regular brokerage account are taxed in the year you receive them. Dividends in a 401(k), traditional IRA, or Roth IRA are not taxed when you receive them. Instead, the tax treatment depends on the account type.

In a traditional IRA or 401(k), dividends grow tax-free while the money stays in the account. You pay income tax on the entire withdrawal when you take money out in retirement, at whatever your tax rate is then.

In a Roth IRA, dividends grow tax-free and you pay no tax on withdrawals in retirement, as long as you follow the withdrawal rules. This makes Roth accounts especially valuable for dividend-paying investments if you expect to be in a high tax bracket later.

Tax rates for may have access to dividends in 2024

may have access to dividends are taxed at 0, 15, or 20 percent depending on your taxable income. The exact income thresholds change each year and depend on your filing status.

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

Your brokerage will not calculate your tax rate for you — that depends on your total income from all sources. You will need to determine your own taxable income to know which bracket applies to your dividends.

Reporting dividends on your tax return

You report dividends on Schedule B (Interest and Ordinary Dividends) and Schedule D (Capital Gains and Losses) of your Form 1040. If your total ordinary dividends are less than $1,500, you may be able to report them directly on Form 1040 without using Schedule B, though most people use the schedules.

The Form 1099-DIV your brokerage sends you will show the total ordinary dividends in box 1a and may have access to dividends in box 1b. You transfer these numbers to your tax return. If you received dividends from multiple sources, you add them all together.

If you sold shares at a loss during the year, you may be able to offset some of your dividend income with capital losses, reducing your taxable income. This is one reason to track your cost basis — the price you paid for the shares — carefully.

Dividends from mutual funds and ETFs

Mutual funds and ETFs distribute dividends to you, and those distributions are taxable in the same way as individual stock dividends. The fund will send you a Form 1099-DIV showing ordinary and may have access to dividends separately.

Some mutual funds are more tax-efficient than others. Index funds and ETFs tend to distribute fewer dividends than actively managed funds because they buy and hold the same stocks for longer. If you are concerned about dividend taxes, tax-managed funds and ETFs are designed to minimize distributions.

Even if you reinvest your dividends back into the fund, they are still taxable in the year you receive them. Reinvestment does not defer the tax.

Frequently Asked Questions

Do I owe taxes on dividends if I reinvest them?

Yes. Reinvesting dividends back into the fund or stock does not change the tax treatment. You owe tax on the full dividend amount in the year you receive it, regardless of whether you take the cash or buy more shares with it.

What if I received a dividend but lost money on the stock?

You still owe tax on the dividend. However, if you sold the stock at a loss, you can use that capital loss to offset the dividend income and other gains, which may reduce your overall tax bill. Keep records of your purchase price and sale price.

Are foreign dividends taxed differently?

Foreign dividends are generally taxed the same way as U.S. dividends, but some foreign countries also tax dividends at the source. You may be able to claim a foreign tax credit on your U.S. return for taxes paid to another country, which reduces your U.S. tax liability.

Do I have to report dividends under $10?

Yes. You must report all dividends, no matter how small. Your brokerage will report them on the Form 1099-DIV, and the IRS will match that to your tax return. Report the full amount shown on the form.

Can I avoid taxes by holding dividend stocks in a trust?

No. The trust itself may owe tax on the dividends, or the tax may pass through to the beneficiaries, depending on the trust structure. Trusts do not eliminate dividend taxes — they only change who pays them. Speak with a tax professional about trust taxation if this applies to you.