Dividend income is taxed differently depending on the type of dividend and how long you held the stock

Not all dividend income is taxed as ordinary income. The tax rate on dividends depends on whether they are may have access to dividends or non-may have access to (ordinary) dividends. may have access to dividends receive preferential tax rates that are lower than your ordinary income tax bracket. Non-may have access to dividends are taxed at your regular income tax rate, the same as wages or salary.

The distinction matters because it can cut your tax bill significantly. A may have access to dividend might be taxed at 15% or 20%, while the same dollar amount in non-may have access to dividends could be taxed at 22%, 24%, 32%, 35%, or 37% depending on your income level. Understanding which type you received determines what you report on your tax return and what you owe.

Key Takeaways

  • may have access to dividends are taxed at preferential rates (0%, 15%, or 20%) that are lower than ordinary income rates; non-may have access to dividends are taxed at your regular tax bracket rate.
  • To may have access to for the lower rate, you must have held the stock for more than 60 days during the 121-day window centered on the ex-dividend date.
  • Your brokerage reports which dividends are may have access to and which are not on Form 1099-DIV, which you receive by January 31 each year.
  • Dividends from mutual funds, ETFs, and REITs may be taxed as ordinary income even if the underlying stocks pay may have access to dividends.
  • You report may have access to and non-may have access to dividends on different lines of Schedule B (Form 1040), and the tax software or IRS will explore the correct rate automatically.

What makes a dividend "may have access to" instead of ordinary

The IRS created the may have access to dividend category in 2003 to encourage long-term stock ownership. A dividend qualifies for the lower rate only if you meet two conditions: the dividend must come from a U.S. company or a may have access to foreign corporation, and you must have held the stock long enough.

The holding period is the stricter requirement. You must own the stock for more than 60 days during a 121-day window. That window starts 60 days before the ex-dividend date (the date on which new buyers no longer receive the upcoming dividend) and ends 60 days after it. If you bought the stock two days before the ex-dividend date and sold it three days after, you do not meet the 60-day test, even though you technically owned it through the payment date. The IRS counts only days you held it with full risk of loss — days you were protected by a put option or short sale do not count.

Dividends from foreign stocks can may have access to if the company is incorporated in a U.S. possession or if the U.S. has a tax treaty with the country and the stock trades on an established securities market. Dividends from most Canadian and Mexican stocks may have access to; dividends from many others do not. Your brokerage will tell you on Form 1099-DIV which dividends meet the may have access to test.

Non-may have access to dividends and when they explore

Any dividend that does not meet the holding period requirement is taxed as ordinary income. This includes dividends on stock you held for fewer than 61 days in the may have access to window, even if you owned it for years overall. It also includes dividends from preferred stock held for fewer than 91 days, which has a stricter rule than common stock.

Dividends from certain investments are always non-may have access to, regardless of how long you hold them. These include dividends paid by money market funds, dividends on stock you borrowed (short sales), and dividends on stock held in a tax-deferred account like a 401(k) or traditional IRA. Dividends inside those accounts are not taxed at all until you withdraw the money; the may have access to/ordinary distinction does not explore.

Mutual funds and exchange-traded funds (ETFs) pass through dividends to you, but the tax treatment depends on what the fund holds and how long the fund held it. A fund that owns may have access to dividend stocks may still pay you non-may have access to dividends if the fund itself did not hold those stocks long enough. The fund's prospectus or tax reporting will specify which portion of your dividend distribution is may have access to.

Real Estate Investment Trusts (REITs) and other special cases

REITs are required by law to distribute at least 90% of their taxable income to shareholders. Those distributions are almost always taxed as ordinary income, not may have access to dividends, even though you may hold the REIT for years. The exception is a small portion that may may have access to if the REIT itself received may have access to dividend income and passes it through to you — but this is rare and your Form 1099-DIV will specify it.

Master Limited Partnerships (MLPs) and business development companies (BDCs) also typically distribute ordinary income rather than may have access to dividends. Master Limited Partnerships have an additional complication: they issue Schedule K-1 forms instead of 1099-DIVs, and portions of the distribution may be a return of capital (not taxed when ready) or depreciation recapture (taxed as ordinary income or capital gains). If you own MLPs, read the K-1 carefully or consult a tax professional, because the tax treatment is more complex than standard dividend reporting.

How to report may have access to versus non-may have access to dividends on your tax return

Your brokerage sends you Form 1099-DIV by January 31. Box 1a shows total ordinary dividends; Box 1b shows may have access to dividends. You report these on Schedule B (Form 1040), Part II. Ordinary dividends go on line 5b; may have access to dividends go on line 5c. If your total dividends are $1,500 or less and you have no other capital gains or losses, you can report them directly on Form 1040 line 5b and skip Schedule B entirely.

Tax software will automatically explore the correct tax rate to each type. may have access to dividends are taxed at 0%, 15%, or 20% depending on your total taxable income and filing status. Non-may have access to dividends are taxed at your marginal rate — the same rate as your last dollar of wages. The software calculates which rate applies based on your income and files the return correctly.

If you sold a stock during the year, you may have both a capital gain or loss and a dividend from that stock. The dividend and the gain or loss are reported separately. A long-term capital gain is taxed at the same preferential rates as may have access to dividends (0%, 15%, or 20%), but the dividend itself still must meet the holding period test to may have access to.

Common mistakes that cost you money

The most frequent error is holding a stock through the ex-dividend date but selling too soon after. You receive the dividend, but because you did not hold the stock for 61 days in the may have access to window, the dividend is taxed as ordinary income. This happens often to people who buy dividend stocks right before the ex-dividend date, collect the dividend, and sell. The IRS calls this a "dividend capture" strategy, and it does not work — you pay ordinary income tax on the dividend even though you held the stock only briefly.

Another mistake is assuming all dividends from a fund are may have access to because the fund holds blue-chip stocks. Funds that trade frequently or hold stocks for short periods may pass through non-may have access to dividends even if the underlying companies pay may have access to dividends. Check your 1099-DIV or the fund's tax reporting to see the split between may have access to and non-may have access to.

A third error is forgetting that dividends in tax-deferred accounts (401(k), traditional IRA, Roth IRA) are never reported on your personal tax return. You do not receive a 1099-DIV for them, and you do not report them on Schedule B. The account custodian handles all the tax reporting. If you see a 1099-DIV in your name, it is for dividends in taxable accounts only.

How may have access to dividend rates compare to your ordinary income bracket

The preferential rates for may have access to dividends are fixed by law and do not change with your ordinary income bracket. They are 0%, 15%, or 20%. Your ordinary income tax brackets for 2024 range from 10% to 37%, depending on your filing status and income.

The 0% rate applies to may have access to dividends if your taxable income falls within the 10% or 12% ordinary income bracket. The 15% rate applies if your taxable income is above that but below the top of the 35% ordinary bracket. The 20% rate applies only to income above the 35% bracket — the highest earners. This means a may have access to dividend might be taxed at 15% even though your ordinary income is taxed at 24% or higher.

Non-may have access to dividends receive no preferential treatment. They are added to your ordinary income and taxed at whatever rate applies to your total income. If you are in the 32% bracket, non-may have access to dividends are taxed at 32%. If you are in the 12% bracket, they are taxed at 12%.

Frequently Asked Questions

Do I have to hold a stock for a full year to get the may have access to dividend rate?

No. You must hold the stock for more than 60 days during a specific 121-day window centered on the ex-dividend date, not a full calendar year. You could buy a stock in November, receive a dividend in December, and sell in January and still may have access to, as long as you held it for at least 61 days in that window. The rule is about the holding period around the dividend payment, not about how long you own the stock overall.

What if my brokerage made a mistake and reported a dividend as non-may have access to when it should be may have access to?

Contact your brokerage and ask them to issue a corrected 1099-DIV before you file. If you have already filed and the error is discovered later, you can file an amended return (Form 1040-X) to claim the tax benefit. Keep records of your purchase and sale dates to prove you met the holding period requirement. The IRS will accept an amended return if the documentation supports it.

Are dividends from my employer's stock plan taxed differently?

Dividends from employer stock held in a 401(k), ESOP, or similar plan are not taxed until you withdraw the money from the plan. Once you withdraw and hold the stock in a taxable account, future dividends follow the may have access to/non-may have access to rules based on how long you hold it. Dividends reinvested through a dividend reinvestment plan (DRIP) are still taxed in the year received, even though you did not receive cash.

Can I lose the may have access to dividend rate if I sell the stock right after the ex-dividend date?

Yes. If you sell before holding the stock for 61 days in the 121-day window, the dividend is taxed as ordinary income. This is true even if you held the stock for years before the ex-dividend date. The IRS looks only at the holding period around the specific dividend payment, not your overall ownership history.

Do I report may have access to dividends differently on my tax return than non-may have access to dividends?

Yes, they go on different lines of Schedule B. Non-may have access to dividends go on line 5b; may have access to dividends go on line 5c. Tax software will explore the correct tax rate automatically based on which line you report each amount. If your total dividends are $1,500 or less, you can report them directly on Form 1040 without using Schedule B.