How Are Dividends Taxed? Qualified and Nonqualified Dividend Tax Rates

If you're an investor, you might be familiar with dividends, which are shares of a company’s profits that are distributed to shareholders. But if you are paid dividends, be aware they aren’t free money — they’re usually taxable income.

There are many exceptions and unusual scenarios with special rules, but here’s generally how dividend tax works.

How are dividends taxed?

For tax purposes, there are two kinds of dividends: qualified and nonqualified (sometimes called "ordinary").

The tax rate on nonqualified dividends follows ordinary income tax rates and brackets (see which tax bracket you're in). Qualified dividends come with the advantage of lower tax rates: 0%, 15% or 20%, depending on taxable income and filing status.

In both cases, people in higher tax brackets pay a higher dividend tax rate.

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What are qualified dividends?

Three things usually determine whether a dividend is qualified:

1. It is paid by a U.S. corporation or a qualifying foreign entity.

2. It is actually a dividend in the eyes of the IRS.

• Premiums that an insurance company pays back.

• Annual distributions credit unions make to members.

• “Dividends” from co-ops or tax-exempt organizations.

3. You held the underlying security for long enough.

Here's an example. If your Ford shares paid a dividend Sept. 1 and the ex-dividend date was July 20, you would need to have owned your shares for at least 61 days between May 21 and Sept. 19. And when you count the days, include the day you sold the shares, but not the day you bought them.

If you don’t hold the shares long enough, the IRS might deem them nonqualified, and you’ll pay the higher, nonqualified tax rate. Again, remember that there are many exceptions — see IRS Publication 550 for the details.

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Qualified dividend tax rates are based on your taxable income. For the 2024 tax year (taxes that were due on April 15, 2025, or by October 15, 2025, with an extension), qualified dividends have a 0% tax rate for taxable incomes up to:

• $47,025 for single filers/those married filing separately.

• $94,050 for those married filing jointly.

• $63,000 for heads of household.

A 15% or 20% tax rate may apply to incomes over this limit.

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For the 2025 tax year (taxes due in 2026), qualified dividends have a 0% tax rate for taxable incomes up to:

• $48,350 for single filers/those married filing separately.

• $96,700 for those married filing jointly.

• $64,750 for heads of household.

A 15% or 20% tax rate may apply to incomes over this limit.

How to report dividend income on your taxes

• After the end of the year, you’ll receive a Form 1099-DIV from your broker or any entity that sent you at least $10 in dividends and other distributions. The 1099-DIV indicates what you were paid and whether the dividends were qualified or nonqualified.

• You use this information to fill out your tax return. You might also need to fill out a Schedule B if you received more than $1,500 in dividends for the year.

• Even if you didn’t receive a dividend in cash — let’s say you automatically reinvested yours to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — you still need to report it.

• You also need to report dividends from investments you sold during the year.

How to control your dividend tax bill

Watch the calendar

You could pay a lower dividend tax rate by holding your investments for the 61-day minimum. Just be sure that doing so aligns with your investment objectives.

Set cash aside

Your employer withholds taxes from your paycheck and sends them to the IRS on your behalf, but there’s usually nobody doing the same with your dividends. You may need to pay estimated taxes throughout the year. Your tax software or a qualified tax pro, such as a local CPA, can help calculate how much that is and when to pay.

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Consider using a retirement account

• Owning dividend-paying investments inside a retirement account could shelter dividends from taxes or defer taxes on them. Think ahead, though. Do you need the income now?

• Also, the type of retirement account matters when it comes to determining the tax bill. When you eventually withdraw money from a traditional IRA, for example, it may be taxed at your ordinary income tax rate rather than at those lower qualified dividend tax rates.

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