The core difference: your tax rate

may have access to dividends are taxed at the long-term capital gains rate, which is lower than the ordinary income tax rate. Ordinary dividends are taxed as regular income at your full tax bracket rate. That is the entire difference, and it matters because the tax you owe on the same dollar amount can be substantially different depending on which category your dividend falls into.

If you earn $1,000 in may have access to dividends and you are in the 24% ordinary income tax bracket, you might pay 15% tax on those dividends instead. If those same $1,000 came as ordinary dividends, you would pay 24%. The gap widens for higher earners: someone in the 37% bracket pays 20% on may have access to dividends but 37% on ordinary ones.

The IRS created this two-tier system to encourage long-term stock ownership. may have access to dividends require you to hold the stock for a minimum period, which is the main condition that separates them from ordinary dividends.

Key Takeaways

  • may have access to dividends use the long-term capital gains tax rate (0%, 15%, or 20% depending on your income), while ordinary dividends use your regular income tax bracket rate.
  • To may have access to for the lower rate, you must hold the stock for more than 60 days during a 121-day window centered on the ex-dividend date.
  • Most dividends from U.S. companies and certain foreign companies are may have access to if you meet the holding period; dividends from real estate investment trusts (REITs) and money market funds are ordinary.
  • Your brokerage reports which dividends are may have access to on your 1099-DIV form, so you do not have to track the holding period yourself.

What makes a dividend may have access to

A dividend becomes may have access to when two conditions are both true: the stock itself must be a type that pays may have access to dividends, and you must hold it long enough. Most common stocks issued by U.S. corporations meet the first condition. Stocks from foreign companies can also pay may have access to dividends, but only if the company is incorporated in a U.S. possession or has stock traded on a U.S. exchange.

The holding period is the second gate. You must own the stock for more than 60 days during the 121-day window that starts 60 days before the ex-dividend date and ends 60 days after it. The ex-dividend date is the cutoff: if you buy the stock on or after that date, you do not receive the dividend at all. If you buy before it and sell within 60 days after, the dividend does not count as may have access to.

This rule prevents people from buying a stock just before the dividend payment, collecting the dividend, and selling when ready. The IRS wants to see genuine ownership over time.

What counts as ordinary dividends

Dividends are ordinary if they come from a stock type that does not may have access to, or if you do not meet the holding period even though the stock itself could pay may have access to dividends. Real estate investment trusts (REITs) always pay ordinary dividends, even if you hold them for years. Dividends from master limited partnerships (MLPs) are ordinary. Money market funds and bond funds pay ordinary dividends.

Preferred stock dividends are ordinary unless the preferred stock meets specific IRS rules about being traded on an established market. If you inherit stock and receive a dividend shortly after, that dividend is ordinary because you have not held it long enough, even though the same dividend would be may have access to if you had owned it longer.

Ordinary dividends also include any special or one-time distributions that a company makes outside of its regular dividend schedule. These are taxed as ordinary income no matter how long you have held the stock.

How your brokerage reports them

You do not have to calculate which dividends are may have access to yourself. Your brokerage sends you a Form 1099-DIV each January that breaks down your dividends into categories. Box 1a shows ordinary dividends. Box 1b shows may have access to dividends. If a dividend appears in Box 1b, it is already may have access to; if it is only in Box 1a, it is ordinary.

The brokerage tracks your holding period automatically using the trade date and the ex-dividend date. They know the rules for each stock type. If you sold the stock too soon to may have access to, they will not list that dividend in Box 1b. If you held it long enough, they will.

When you file your tax return, you report may have access to dividends on Schedule B and then transfer them to a different line on your 1040 than ordinary dividends go. Your tax software usually handles this routing if you enter the numbers from your 1099-DIV correctly.

The tax rate tables for each type

may have access to dividends use the long-term capital gains rates, which are set by law and do not change year to year. For 2024, those rates are 0%, 15%, or 20% depending on your taxable income and filing status. The brackets are much wider than ordinary income brackets, so many people in the 24% or 32% ordinary bracket still pay only 15% on may have access to dividends.

Ordinary dividends use your regular income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, or 37%. These change slightly each year for inflation. A person in the 22% bracket pays 22% on ordinary dividends but only 15% on may have access to ones from the same company.

The exact rate you pay depends on your total taxable income for the year, not just the dividend amount. If you have other income from a job or business, that pushes you into a higher bracket, which can push some of your dividends into a higher rate as well.

When you might receive ordinary dividends instead

If you own a diversified portfolio, you will likely receive both types. Dividend-focused exchange-traded funds (ETFs) often hold a mix of stocks and REITs, so part of your distribution is may have access to and part is ordinary. Bond funds pay only ordinary dividends. If you own individual REIT shares, all dividends are ordinary.

Timing matters too. If you buy a stock right before its ex-dividend date and sell shortly after collecting the dividend, your brokerage will report that dividend as ordinary even if the stock normally pays may have access to dividends. This happens often with dividend-capture strategies that do not work out as planned.

Some investors deliberately hold stocks for less than the required 60 days because the dividend is small or the stock price is falling. In those cases, the ordinary dividend status is a side effect of a deliberate choice, not a surprise.

Frequently Asked Questions

Can the same stock pay both may have access to and ordinary dividends?

Yes. If a company pays a regular quarterly dividend and a special one-time distribution, the regular dividend may be may have access to (if you hold long enough) while the special distribution is ordinary. You can also receive both types from the same stock in different years if your holding period changes.

What if I sell the stock before the dividend is paid?

If you sell before the ex-dividend date, you do not receive the dividend at all. The new owner receives it. If you sell after the ex-dividend date but before the payment date, you still receive the dividend because you owned it on the ex-date. The holding period rule still applies to determine whether it is may have access to.

Do I have to report may have access to and ordinary dividends separately on my tax return?

Yes. may have access to dividends go on a separate line of your 1040 and are taxed at capital gains rates. Ordinary dividends go on a different line and are taxed as regular income. Your tax software will route them correctly if you enter the amounts from your 1099-DIV in the right boxes.

What happens if my brokerage makes a mistake on the 1099-DIV?

Contact your brokerage and ask for a corrected form. They issue a corrected 1099-DIV (marked as such) that you file with your return. If you already filed, you can file an amended return using Form 1040-X with the correct dividend amounts.

Are dividends from foreign stocks always ordinary?

No. Foreign stocks can pay may have access to dividends if the company is incorporated in a U.S. possession or its stock is traded on a U.S. exchange and you meet the holding period. Your 1099-DIV will show which ones are may have access to. Dividends from some foreign stocks are ordinary because they do not meet these conditions.