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 typically are cash distributions to their stockholders paid out of the earnings and profits of the corporation. But, as with most forms of taxable income, dividends are generally subject to income tax. We’re here to tell you how.

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 don’t 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 that amount will be and when will it be paid out. Typically, corporations that regularly pay dividends pay them quarterly, although they may be paid monthly, semi-annually 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 if the dividends are received in a tax-deferred account, like an IRA, in which case the taxation of the dividends might be deferred until a later date. If the dividends are received in a Roth IRA, then the dividends may not be taxed at all unless the account holder violates the withdrawal rules.

If a U.S. taxpayer has received dividend income of over $10 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 2024 and 2025, 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 have been paid by a U.S. or a 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 13, 2025 and an investor bought it on January 11, 2025 and sells it on March 12, 2025, then the dividend received would be classified as an ordinary dividend (and not as a qualified dividend) because the number of days between January 12, 2025 and March 12, 2025 (inclusive) is 60. If, however, the investor sold the stock on March 13, 2025, then the dividend would be classified as 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 from state to state and are subject to change.

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