Yes, you pay taxes on most dividends, but the tax rate depends on the type of dividend and your income level
Dividends are taxable income. The IRS treats them as earnings from your investments, and you report them on your tax return. However, not all dividends are taxed the same way. may have access to dividends — dividends from stocks you've held for a set period — are taxed at lower rates than ordinary dividends, which are taxed as regular income. The exact amount you owe depends on which type you receive and your total taxable income for the year.
Some dividends are tax-free in specific accounts. If you hold dividend-paying investments inside a Roth IRA or Roth 401(k), you owe no federal tax on the dividends. In a traditional 401(k) or traditional IRA, dividends grow tax-deferred, meaning you don't pay tax until you withdraw the money. In a regular taxable brokerage account, you pay tax on dividends every year, whether you reinvest them or take the cash.
Key Takeaways
- may have access to dividends are taxed at 0%, 15%, or 20% depending on your income; ordinary dividends are taxed as regular income at rates up to 37%.
- To may have access to for the lower rate, you must hold the stock for at least 60 days around the dividend payment date.
- Dividends in Roth accounts are never taxed; dividends in traditional retirement accounts are taxed when you withdraw.
- You report dividends on Form 1099-DIV, which your brokerage sends you by January 31 each year.
- State and local taxes may also explore to dividends, depending on where you live.
The difference between may have access to and ordinary dividends
may have access to dividends receive preferential tax treatment. They are taxed at the long-term capital gains rate: 0%, 15%, or 20%, depending on your filing status and total taxable income. Most dividends from U.S. companies and certain foreign companies may have access to for this lower rate.
To receive the may have access to rate, you must meet a holding period requirement. You need to own the stock for at least 60 days during the 121-day window that begins 60 days before the ex-dividend date. The ex-dividend date is the cutoff: if you buy the stock on or after that date, you don't receive the upcoming dividend. This rule prevents investors from buying a stock just before the dividend payment and selling when ready after.
Ordinary dividends are taxed as ordinary income at your regular tax bracket rate, which can be as high as 37%. These include dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and some preferred stocks. Mutual funds and exchange-traded funds (ETFs) that hold these investments pass through ordinary dividends to you.
Your brokerage reports which dividends are may have access to and which are ordinary on Form 1099-DIV. The form separates them into different boxes so you can report them correctly on your tax return.
Tax rates for may have access to dividends in 2024
may have access to dividends are taxed at three possible rates: 0%, 15%, or 20%. Your rate depends on your filing status and your total taxable income for the year, not on the amount of the dividend itself.
| Tax Rate | Single Filers | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 | Up to $47,025 | Up to $62,700 |
| 15% | $47,025 to $518,900 | $94,050 to $583,750 | $47,025 to $291,875 | $62,700 to $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $291,875 | Over $551,350 |
These income thresholds are adjusted each year for inflation. The IRS publishes updated amounts in the spring. If your income falls in the 0% bracket, you may owe no federal tax on your may have access to dividends even though you must still report them.
How dividends are taxed in different account types
Taxable brokerage accounts require you to pay tax on dividends every year. You receive a 1099-DIV form by January 31, report the dividends on your tax return, and pay tax based on the rates above. This applies whether you reinvest the dividends or withdraw them as cash.
Traditional IRAs and traditional 401(k)s shelter dividends from when ready taxation. The dividends grow inside the account without triggering a tax bill each year. You pay tax only when you withdraw money from the account, and withdrawals are taxed as ordinary income at your tax bracket at the time of withdrawal. Withdrawals before age 59½ may also trigger a 10% early withdrawal penalty, with some exceptions.
Roth IRAs and Roth 401(k)s offer tax-free dividend growth. You contribute after-tax dollars, but dividends and all other growth are never taxed, and may have access to withdrawals are tax-free. This makes Roth accounts especially valuable if you expect to receive substantial dividends over time.
529 education savings plans work similarly to Roth accounts for education expenses. Dividends grow tax-free, and withdrawals for may have access to education costs are tax-free. Withdrawals for non-education purposes are taxed on the earnings portion.
Reporting dividends on your tax return
Your brokerage sends you Form 1099-DIV by January 31 each year. This form lists all dividends paid to you during the previous calendar year, broken down by type: may have access to dividends, ordinary dividends, capital gain distributions, and others.
You report this information on Schedule B (Interest and Ordinary Dividends) if your dividends total more than $1,500, or directly on Form 1040 if they are $1,500 or less. may have access to dividends go on a separate line from ordinary dividends so they receive the correct tax rate.
If you own mutual funds or ETFs, the fund itself may distribute capital gains to you at year-end. These are separate from dividends and are reported on Form 1099-DIV as well. Capital gain distributions are taxed as long-term capital gains regardless of how long you've owned the fund.
State and local taxes on dividends
Federal tax is not the only tax on dividends. Most states tax dividend income, though the rate and rules vary. Some states tax dividends as ordinary income at the same rate as wages. Others have a separate, lower rate for investment income. A few states don't tax dividends at all.
New Hampshire and Tennessee, for example, tax only dividend and interest income, not wages. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax at all. If you live in a state with income tax, check your state's tax authority website or consult a tax professional to understand how dividends are treated in your state.
Some cities also impose local income taxes that explore to dividends. This is less common but does occur in places like New York City and Columbus, Ohio. Your brokerage may withhold state and local taxes automatically, or you may need to pay estimated taxes if you receive large dividend payments.
Dividend income and the net investment income tax
If your modified adjusted gross income exceeds certain thresholds, you may owe an additional 3.8% net investment income tax (NIIT). This tax applies to dividends, capital gains, and other investment income.
The thresholds are $200,000 for single filers and $250,000 for married couples filing jointly. If your income exceeds these amounts, the NIIT applies to the lesser of your net investment income or the amount by which your income exceeds the threshold. This tax was enacted as part of the Affordable Care Act and is separate from your regular income tax.
Frequently Asked Questions
Do I have to pay taxes on dividend reinvestment?
Yes. Whether you take dividends as cash or reinvest them back into the stock, you owe tax in the year the dividend is paid. The IRS taxes the dividend based on its value on the payment date, not on whether you spend it or buy more shares. Reinvestment does not defer or eliminate the tax.
What happens if I don't hold a stock long enough to get the may have access to dividend rate?
The dividend is taxed as ordinary income at your regular tax bracket rate instead of the lower may have access to rate. This can significantly increase your tax bill. For example, if you're in the 24% bracket, ordinary dividends are taxed at 24% instead of 15%. This is why the 60-day holding period matters for large dividend payments.
Do I report dividends from a Roth IRA on my tax return?
No. Dividends inside a Roth IRA are not reported on your tax return. You report only the contributions you make and any may have access to withdrawals. The account grows tax-free, and the IRS does not track the internal activity.
Can I deduct investment losses against dividend income?
Yes, but with limits. You can use capital losses to offset capital gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 of net losses against ordinary income (including wages and dividends) in a single year. Excess losses carry forward to future years. This strategy is called tax-loss harvesting.
What if my brokerage withholds too much tax on my dividends?
If your brokerage withholds more tax than you actually owe, you receive a refund when you file your tax return. The 1099-DIV form shows the amount withheld, and you claim it as a credit on your return. This often happens if you're in a lower tax bracket than the default withholding rate.