How Dividends Are Taxed in the US: Qualified vs. Ordinary Dividends

Dividends are a wonderful source of income — but in a taxable account, the IRS takes a share. How much depends on the type of dividend, how long you've held the stock and your income. Understanding the rules helps you keep more of what you earn.

Tax rules change and depend on your circumstances. This is general education, not tax advice; see IRS Topic 404 on dividends and consult a tax professional.

Qualified Dividends

Most dividends from US companies, and from many qualifying foreign companies, are qualified dividends. They're taxed at the lower long-term capital gains rates — 0%, 15% or 20%, depending on your taxable income. Higher earners may also owe the 3.8% Net Investment Income Tax.

The holding period rule To receive qualified treatment, you must generally hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Buying a stock just before the ex-date and selling soon after usually means the dividend is taxed as ordinary income. See our ex-dividend date guide.

Ordinary (Non-Qualified) Dividends

Ordinary dividends are taxed at your regular income tax rate. Common examples:

• Most distributions from REITs.
• Dividends on shares not held long enough.
• Distributions from money market funds and many bond funds (which are typically interest).

Form 1099-DIV

Each year your broker sends Form 1099-DIV, which separates total ordinary dividends from the qualified portion and reports capital gains distributions from funds.

Dividends From Funds

ETFs and mutual funds pass through the character of the dividends they receive. A broad US stock ETF typically pays mostly qualified dividends; a REIT or bond fund pays mostly ordinary income. Our ETF vs. mutual fund guide explains capital gains distributions.

Reinvested Dividends Are Still Taxable

Even if dividends are automatically reinvested through a DRIP, they're taxable in the year received in a taxable account. Keep records, because reinvested amounts increase your cost basis.

How to Reduce Dividend Taxes

1. Use tax-advantaged accounts. In a Roth IRA, qualified withdrawals are tax-free; in traditional IRAs and 401(k)s, taxes are deferred. See our Roth IRA vs. 401(k) guide.
2. Asset location. Hold REITs and high-yield funds in tax-advantaged accounts, and qualified-dividend stocks or tax-efficient ETFs in taxable accounts.
3. Meet holding periods to keep dividends qualified.
4. Mind your bracket. In lower income years, qualified dividends may fall into the 0% bracket.

Foreign Dividends

Foreign governments may withhold tax on dividends from international stocks. In taxable accounts, US investors may be able to claim a foreign tax credit.