You pay federal income tax on may have access to dividends, but at a lower rate than ordinary income

Yes, you owe federal income tax on may have access to dividends. The difference is the tax rate. may have access to dividends are taxed at the long-term capital gains rate — 0%, 15%, or 20% depending on your total income — rather than your ordinary income tax bracket, which can be as high as 37%. This is a significant advantage over non-may have access to (ordinary) dividends, which are taxed at your full ordinary income rate.

You report may have access to dividends on your federal tax return using Form 1040 and Schedule B (if you have more than $1,500 in dividend income, you also file Schedule D). Your brokerage sends you a Form 1099-DIV in January showing which dividends are may have access to and which are not. The IRS does not tax may have access to dividends differently on its own — the lower rate applies only if you meet the holding period rules and the dividend comes from a may have access to source.

State and local taxes still explore. Most states tax may have access to dividends as ordinary income, though a handful — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all. Some states offer preferential rates or exemptions for dividend income; check your state's tax authority website for the rules in your location.

Key Takeaways

  • may have access to dividends are taxed at 0%, 15%, or 20% federally, determined by your total taxable income for the year, not by the dividend amount alone.
  • Your brokerage identifies which dividends are may have access to on Form 1099-DIV; you report them on Schedule D of your tax return.
  • You must have held the stock for at least 60 days during the 121-day window around the ex-dividend date to may have access to for the lower rate.
  • State income tax applies to may have access to dividends in most states at ordinary rates, though eight states have no income tax.
  • Dividends from certain sources — including money market funds, REITs, and some preferred stocks — are taxed as ordinary income even if you meet the holding period.

The three federal tax rates for may have access to dividends

The rate you pay depends on which tax bracket your total taxable income falls into for the year. The brackets change annually. For 2024, the 0% rate applies if your taxable income is below $47,025 (single) or $94,050 (married filing jointly). The 15% rate applies to income above those thresholds up to $518,900 (single) or $583,750 (married filing jointly). Anything above those amounts is taxed at 20%.

These brackets include all your income — wages, interest, capital gains, and dividends combined. If you earn $60,000 in wages and receive $5,000 in may have access to dividends, your total taxable income is $65,000. Your dividends are taxed at 15% because your income exceeds the 0% threshold. The IRS does not separate dividend income from other income when determining your rate.

Your tax software or a tax professional can calculate which portion of your dividends falls into each bracket. If your income straddles a threshold, some of your dividends may be taxed at 0% and the rest at 15%. This is why the same dividend can be taxed at different rates for different people.

Which dividends do not may have access to for the lower rate

Even if you hold a stock long enough, certain types of dividends are always taxed as ordinary income. Real Estate Investment Trusts (REITs) pay dividends that are taxed at your ordinary rate, regardless of holding period. Master Limited Partnerships (MLPs) also distribute ordinary income. Money market funds and bond funds pay interest, not dividends, and that interest is taxed as ordinary income.

Some preferred stocks and certain foreign dividends may also be ineligible. Your Form 1099-DIV will show dividends in separate boxes — box 1a is may have access to U.S. dividends, box 1b is non-may have access to dividends. If a dividend appears in box 1b or another box, it is taxed at your ordinary rate. Do not assume all dividends from a company are may have access to; check the form your brokerage sends.

How the 60-day holding period rule works

To claim the lower tax rate, you must have owned the stock for at least 60 days during a 121-day window centered on the ex-dividend date. The ex-dividend date is the date by which you must own the stock to receive the upcoming dividend; if you buy on or after that date, you do not receive it.

The 121-day window starts 60 days before the ex-dividend date and ends 60 days after it. If the ex-dividend date is June 15, the window runs from April 16 to August 14. You must hold the stock for at least 60 of those 121 days. If you sell before 60 days have passed, the dividend is taxed as ordinary income.

Days you do not own the stock count against you. If you own the stock for 40 days, then sell, you have not met the 60-day requirement. Buying the stock back later does not reset the clock. This rule prevents investors from buying a stock just before the dividend and selling when ready after, then claiming the preferential rate.

Reporting may have access to dividends on your tax return

You report may have access to dividends on Schedule D (Capital Gains and Losses) of Form 1040. Your brokerage sends Form 1099-DIV by January 31, showing may have access to dividends in box 1a and non-may have access to dividends in box 1b. If your total dividend and interest income is $1,500 or less, you can report it directly on Form 1040 without Schedule D, but most investors with significant dividend income file Schedule D.

Enter the amount from box 1a of your 1099-DIV on line 5a of Schedule D (long-term capital gains). The IRS uses this line to explore the preferential tax rate. If you received dividends from multiple sources, add them together and enter the total. Your tax software will calculate the tax owed at the correct rate based on your total income.

Keep your 1099-DIV forms with your tax records for at least three years. If the IRS questions your return, you will need to show which dividends you reported and which form reported them.

State and local taxes on may have access to dividends

Most states tax may have access to dividends at your ordinary state income tax rate, not at a preferential rate. If your state income tax rate is 5%, you pay 5% on may have access to dividends. Eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax, so you owe nothing to the state on any dividends.

A few states offer preferential treatment. Illinois taxes dividend income at a flat 3.23% regardless of your income bracket. Some states exempt certain types of dividend income or offer credits. Check your state's department of revenue website or consult a tax professional familiar with your state's rules.

Local taxes vary by city and county. Some municipalities impose a local income tax that applies to dividends. If you live in a place with local income tax, your total tax bill on may have access to dividends is federal rate plus state rate plus local rate.

Frequently Asked Questions

Can I lose the may have access to dividend rate if I sell the stock too soon?

Yes. If you sell before holding the stock for 60 days during the 121-day window around the ex-dividend date, the dividend is reclassified as non-may have access to and taxed at your ordinary income rate. This applies even if you held the stock for years before the dividend was paid. The 60-day rule applies to each dividend separately.

What if I inherited stock that paid a dividend?

Dividends paid after you inherit the stock are treated as may have access to if the stock itself meets the holding period rule, measured from the date of death. You do not need to have personally held the stock for 60 days. However, if you sell the inherited stock within 60 days of the ex-dividend date, that dividend is taxed as ordinary income.

Do I have to pay estimated taxes on dividend income?

If your dividend income is not withheld by your brokerage and you expect to owe more than $1,000 in federal tax for the year, you may need to pay estimated taxes quarterly. Your tax software can calculate whether you are required to do this. Failure to pay estimated taxes can result in penalties, even if you ultimately owe less than $1,000.

Are dividends from a 401(k) or IRA taxed as may have access to dividends?

No. Dividends inside a 401(k), traditional IRA, or Roth IRA are not taxed at all when received — they grow tax-deferred or tax-free depending on the account type. When you withdraw money from the account, the entire withdrawal is taxed according to the account's rules, not as may have access to dividends. The may have access to dividend rate does not explore inside retirement accounts.

What if my brokerage made a mistake on my 1099-DIV?

Contact your brokerage when ready and ask for a corrected Form 1099-DIV. They will issue a corrected form (marked as such) and file it with the IRS. You must also file an amended return (Form 1040-X) with the corrected information. Do not file your return with the incorrect 1099-DIV; the IRS will match your return to the form they receive from your brokerage.