Stock dividends are taxed differently depending on how long you hold the stock

Not all stock dividends are taxed the same way. The tax rate depends on whether the dividend is ordinary or may have access to. Ordinary dividends are taxed at your regular income tax rate — the same rate that applies to wages, interest, and other ordinary income. may have access to dividends get a lower tax rate that Congress set specifically for long-term investors. The difference can be significant: an ordinary dividend might be taxed at 24% or higher, while a may have access to dividend on the same stock might be taxed at 15% or 20%.

Your brokerage will tell you which type each dividend is. When you receive a dividend, your broker sends you a 1099-DIV form in January showing how much was ordinary and how much was may have access to. You report both on your tax return, but they go on different lines because they are taxed at different rates.

Key Takeaways

  • Ordinary dividends are taxed at your full income tax rate, which ranges from 10% to 37% depending on your income and filing status.
  • may have access to dividends are taxed at a lower rate: 0%, 15%, or 20%, depending on your total income for the year.
  • To may have access to for the lower rate, you must hold the stock for more than 60 days during the 121-day window around the dividend payment date.
  • Your broker reports ordinary and may have access to dividends separately on Form 1099-DIV, and you report them on different lines of your tax return.
  • Some dividends, like those from money market funds or bonds, are always taxed as ordinary income and never may have access to for the lower rate.

What makes a dividend ordinary instead of may have access to

A dividend is ordinary if you do not meet the holding-period requirement. Specifically, you must own the stock for more than 60 days during a 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the date the company sets as the cutoff — if you own the stock on that date, you get the dividend. If you sell before that date, you do not.

The 121-day window exists to prevent people from buying a stock just before the dividend, collecting it, and selling when ready. If you hold for fewer than 61 days in that window, the dividend is ordinary. If you hold for 61 days or more, it is may have access to and gets the lower tax rate.

Some dividends are always ordinary, no matter how long you hold the stock. These include dividends from money market funds, bond funds, real estate investment trusts (REITs), and master limited partnerships (MLPs). Your broker will label these as ordinary on your 1099-DIV.

How ordinary dividend tax rates work

Ordinary dividends are taxed at your marginal tax rate — the rate that applies to your highest dollar of income. If you are in the 22% tax bracket, ordinary dividends are taxed at 22%. If you are in the 35% bracket, they are taxed at 35%. The 2024 federal tax brackets range from 10% to 37%, depending on your filing status and total income.

Your state may also tax ordinary dividends. Most states tax them as regular income, though a few states do not tax dividends at all. Check your state's tax rules or ask your accountant what rate applies where you live.

Ordinary dividends are added to your other income on your tax return. If you earn $60,000 in wages and receive $5,000 in ordinary dividends, your taxable income is $65,000. The dividend pushes you higher into the tax brackets, which can increase your overall tax bill.

How may have access to dividend tax rates work

may have access to dividends are taxed at a preferential rate set by federal law. For 2024, the rates are 0%, 15%, or 20%, depending on your total taxable income and filing status. These rates are much lower than ordinary income rates.

The 0% rate applies if your income is below a certain threshold — for single filers in 2024, that threshold is $47,025. If your income falls between $47,025 and $518,900, you pay 15%. If your income exceeds $518,900, you pay 20%. These thresholds change each year with inflation.

Because may have access to dividends are taxed at these lower rates, they do not push you into higher tax brackets the way ordinary dividends do. A $5,000 may have access to dividend might cost you $750 in tax at the 15% rate, while the same $5,000 in ordinary dividends could cost $1,100 at the 22% rate.

How to know which dividends you received

Your broker sends you a Form 1099-DIV by January 31 each year. This form breaks down your dividends into categories. Box 1a shows ordinary dividends. Box 1b shows may have access to dividends. Some brokers also show this information in your account dashboard or tax documents section.

If you own dividend-paying stocks through a mutual fund or exchange-traded fund (ETF), the fund itself receives the dividends and distributes them to you. The fund reports what portion is ordinary and what portion is may have access to on the 1099-DIV it sends you. You do not need to track the holding period yourself — the fund does that work.

If you own individual stocks, you are responsible for tracking whether you meet the 60-day holding requirement. Many investors use a spreadsheet or their broker's tools to track purchase dates and ex-dividend dates. If you are unsure, your broker's customer service can tell you whether a specific dividend qualifies.

What happens if you sell the stock before the ex-dividend date

If you sell a stock before the ex-dividend date, you do not receive the dividend at all. The new owner gets it instead. This is straightforward — no dividend, no tax.

The confusion arises when you sell after the ex-dividend date but before you have held the stock for 61 days in the 121-day window. In that case, you receive the dividend, but it is taxed as ordinary income because you did not meet the holding requirement. You still owe tax on it, just at your full income tax rate instead of the lower may have access to rate.

Reporting dividends on your tax return

You report dividends on Schedule B (Interest and Ordinary Dividends) and Schedule D (Capital Gains and Losses) of Form 1040. Ordinary dividends go on Schedule B. may have access to dividends go on Schedule D, where they are taxed at the preferential rates.

If your total ordinary dividends are $1,500 or less and you have no other investment income, you may be able to report them directly on Form 1040 without filing Schedule B. Check the current year's instructions to see if this shortcut applies to you.

Many tax software programs walk you through this process. You enter the amounts from your 1099-DIV, and the software puts them in the right places and calculates the tax. If you use a tax professional, give them all your 1099-DIVs, and they will handle the reporting.

Frequently Asked Questions

Can I avoid the holding-period rule by buying the stock right before the dividend?

No. The 121-day window is designed to prevent this. You must hold the stock for more than 60 days during the 121-day period centered on the ex-dividend date. Buying a few days before the ex-dividend date does not help — you still need to hold for 61 days total to get the may have access to rate.

What if I own the stock in a retirement account like a 401(k) or IRA?

Dividends in retirement accounts are not taxed when you receive them. You pay tax later when you withdraw money from the account. The ordinary versus may have access to distinction does not matter inside a retirement account because the account itself is tax-deferred or tax-free.

Do I owe tax on dividends I reinvest instead of taking as cash?

Yes. Whether you take the dividend as cash or reinvest it in more shares, you owe tax on it in the year you receive it. Reinvestment does not defer the tax. Your broker reports the full dividend amount on your 1099-DIV regardless of what you did with the money.

What if a company calls it a dividend but it is really a return of capital?

Some companies distribute cash that is a return of your original investment rather than a profit. These are called return-of-capital distributions and are taxed differently — they reduce your cost basis in the stock rather than being taxed as income. Your 1099-DIV will distinguish these from ordinary and may have access to dividends. If you are unsure, ask your broker or the company's investor relations department.

Do I have to pay estimated taxes on dividends?

If your dividend income is large enough that your total tax bill is significantly higher than what your employer withholds, you may need to make quarterly estimated tax payments. This depends on your total income, filing status, and other factors. A tax professional can tell you whether estimated payments are required in your situation.