Yes, you pay federal income tax on most dividends you receive

Dividends are taxed as income by the IRS. The amount you owe depends on what type of dividend you receive and how long you held the stock. Most people pay tax on dividends at their ordinary income tax rate, but some dividends may have access to for a lower rate called the long-term capital gains rate.

You report dividend income on your federal tax return whether you reinvest the dividends back into the stock or take the cash. The brokerage firm or mutual fund company that paid you the dividend will send you a Form 1099-DIV in January, which lists exactly what you received and what type it was. You use this form to fill out your tax return.

State and local taxes on dividends vary by where you live. Some states tax dividend income the same as wages. Others tax it at a different rate or do not tax it at all. Check your state's tax authority website to learn what applies to you.

Key Takeaways

  • may have access to dividends are taxed at the long-term capital gains rate (0%, 15%, or 20% depending on your income), which is usually lower than your ordinary income tax rate.
  • Ordinary dividends are taxed at your regular income tax rate, which can range from 10% to 37% depending on your tax bracket.
  • You must hold the stock for more than 60 days around the dividend payment date for the dividend to count as may have access to.
  • Your brokerage sends you a Form 1099-DIV showing the type and amount of dividends, which you use to report the income on your tax return.
  • State and local taxes on dividends depend on where you live and may add to your federal tax bill.

may have access to dividends versus ordinary dividends

The IRS sorts dividends into two categories, and the category determines your tax rate. may have access to dividends are taxed at the long-term capital gains rate. Ordinary dividends are taxed at your regular income tax rate, which is higher.

may have access to dividends come from U.S. companies or certain foreign companies and meet a holding period rule: you must own the stock for more than 60 days during a 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the cutoff — if you buy the stock on or after that date, you do not receive the dividend. If you sell the stock before you hit 60 days of ownership, the dividend does not count as may have access to.

Ordinary dividends come from real estate investment trusts (REITs), master limited partnerships, and some foreign stocks. They are also what you get if you do not meet the holding period for may have access to status. Ordinary dividends are taxed at your full income tax rate, which ranges from 10% to 37% depending on your income and filing status.

Long-term capital gains rates for may have access to dividends

may have access to dividends use the same tax rates as long-term capital gains. For 2024, those rates are 0%, 15%, or 20%, depending on your taxable income and filing status. These rates are much lower than ordinary income tax rates, which is why holding the stock long enough to may have access to matters.

The 0% rate applies to lower-income filers. The 15% rate covers most middle-income taxpayers. The 20% rate applies to high-income filers. The exact income thresholds change each year and depend on whether you file as single, married filing jointly, head of household, or another status. The IRS publishes updated brackets every January.

Because the rates are lower, a may have access to dividend of $1,000 might cost you $150 in federal tax at the 15% rate, while an ordinary dividend of $1,000 could cost you $240 or more if you are in the 24% tax bracket. The difference adds up if you receive dividends regularly.

How to report dividends on your tax return

Your brokerage or mutual fund company sends you a Form 1099-DIV by January 31 each year. This form shows the total dividends you received and breaks them down by type — may have access to dividends go in one box, ordinary dividends in another, and capital gain distributions in yet another. You use this form to fill out Schedule B (Interest and Ordinary Dividends) or Schedule 1 (Additional Income), depending on the total amount.

If your total dividends and interest are $1,500 or less, you can report them directly on your Form 1040 without using Schedule B. If you have more than $1,500, you must use Schedule B and attach it to your return. may have access to dividends go on a separate line on your return so they are taxed at the lower rate.

Keep your 1099-DIV forms with your tax records for at least three years. If you received a dividend from a stock you sold during the year, make sure the 1099-DIV matches your brokerage statement. Errors happen, and you want to catch them before filing.

Dividends from retirement accounts

If you own dividend-paying stocks inside a traditional IRA, Roth IRA, 401(k), or other retirement account, you do not pay tax on the dividends while they sit in the account. The dividends reinvest automatically and grow tax-free (or tax-deferred, depending on the account type).

You only pay tax when you withdraw money from the account. With a traditional IRA or 401(k), withdrawals are taxed as ordinary income at your full tax rate. With a Roth IRA, may have access to withdrawals are tax-free. This is one reason retirement accounts are useful for dividend investors — the tax is delayed or eliminated entirely.

State and local taxes on dividends

Most states tax dividend income as part of your state income tax return. A few states do not have income tax at all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only dividend and interest income, not wages.

In states that do tax dividends, the rate is usually the same as your state income tax rate on wages. Some states offer a lower rate for long-term capital gains or may have access to dividends, similar to the federal system. Check your state's tax authority website or a tax professional to learn the exact rules for your state.

Frequently Asked Questions

Do I have to pay tax on dividends if I reinvest them?

Yes. Whether you take the dividend as cash or reinvest it back into the stock, you owe federal income tax on it. The IRS taxes the dividend in the year you receive it, not when you sell the stock. Your 1099-DIV will show the full amount you received, and that is what you report on your tax return.

What if I received a dividend from a stock I sold before the ex-dividend date?

You do not receive the dividend at all if you sold the stock before the ex-dividend date. The person who owns the stock on the ex-dividend date receives it. If your 1099-DIV shows a dividend you do not think you should have received, contact your brokerage to verify the dates.

Can I deduct investment losses to offset dividend income?

Yes, but with limits. You can deduct capital losses against capital gains and up to $3,000 of ordinary income per year. Any losses beyond that carry forward to future years. You report this on Schedule D (Capital Gains and Losses) when you file your tax return. A tax professional can help you figure out the best way to use losses to reduce your tax bill.

Do I owe taxes on dividend income if I did not work that year?

You may still owe federal income tax on dividend income even if you had no wages. The threshold for filing a return depends on your age and filing status. For 2024, a single person under 65 must file if they have more than $13,850 in income from any source, including dividends. Check the IRS website for your specific situation.

What is a dividend reinvestment plan, and does it change my taxes?

A dividend reinvestment plan (DRIP) automatically uses your dividend payment to buy more shares of the same stock. You still owe tax on the full dividend amount in the year you receive it, even though you did not take the cash. The new shares you buy have a cost basis equal to the dividend amount, which you use later to calculate gains or losses when you sell.