How are dividends taxed?

Wouldn’t it be nice if you could get paid just for holding a stock? Well, with some stocks, you can. Some companies pay out dividends to their investors, which are typically cash distributions to stockholders paid from earnings and profits of the corporation. But, as with most forms of taxable income, dividends are generally subject to income tax. This article explains how dividends are taxed.

What is a dividend?

A dividend is a periodic distribution that a company may make to its stockholders. Typically, corporations pay dividends as cash distributions, but they can also be in the form of distributions of other property. Dividends are considered “passive” income because you do not have to do much to receive it other than to hold the stock – as opposed to, for example, the “active” income you get as compensation for working a job.

A corporation’s board of directors generally decides if there will be a dividend payout, what the amount will be and when it will be paid out. Typically, corporations that regularly pay dividends pay them quarterly, although they may be paid monthly, semiannually or at other times as determined by the board of directors.

Dividends and the IRS

Generally, dividends are a form of taxable income for the recipient shareholder. There are exceptions to this: For example, dividends received in a tax-deferred account, like an IRA, may be taxed at a later date; and dividends received in a Roth IRA may not be taxed at all unless the account holder violates withdrawal rules.

If a U.S. taxpayer has received dividend income of $10 or more per year, generally the dividends are required to be reported by the company paying the dividend and/or the taxpayer’s broker using IRS Form 1099-DIV, which is required to be filed with the Internal Revenue Service (IRS) as well as provided to the taxpayer.

From a U.S. federal income tax perspective, dividends may be classified as either qualified or non-qualified. Qualified dividends are taxed at more favorable rates than non-qualified dividends, which are taxed at the same rates applicable to ordinary income.

For tax years 2025 and 2026, the qualified dividend tax rate tiers are 0%, 15% and 20%. Which tax rates apply to your qualified dividends depends on your filing status and your taxable income. An additional 3.8% net investment income tax may also apply for filers whose income exceeds certain thresholds: $200,000 for single filers and $250,000 for married couples who file jointly, for example. This means the maximum U.S. federal income tax rate applicable to qualified dividends could be up to 23.8% for those taxpayers, depending on their taxable income. The non-qualified dividend tax rate tiers are 10%, 12%, 22%, 24%, 32%, 35% and 37%, which are identical to the ordinary income tax rate tiers.

Qualified dividends

According to the IRS, a dividend is considered to be qualified only if certain conditions are met. Broadly speaking, the dividend must be paid by a U.S. or qualified foreign corporation, must satisfy a holding period requirement and meet certain other requirements.

In order to satisfy the holding period requirement and be eligible to receive a qualified dividend, you must have held the stock for “more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.” The ex-dividend date is defined as the first date that follows the declaration of a dividend on which the person buying the stock does not qualify to receive the dividend payment. For this purpose, the number of days that the stock was held includes the day when it was sold but not the day when it was bought.

For example, if the ex-dividend date of ABC stock was January 16, 2026, and an investor bought it on January 15, 2026, and sold it on March 16, 2026, then the dividend received would be classified as ordinary, not qualified, because the number of days between January 16, 2026, and March 16, 2026 (inclusive) is 60. If, however, the investor sold the stock on March 17, 2026, the dividend would be qualified, as the day count is now 61.

Lastly, it’s important to remember that everyone's circumstances are unique, so each taxpayer should consult with a tax professional for questions regarding their particular circumstances, including all the rules of each applicable state, which may vary and are subject to change.

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