Are Dividends Taxed When Declared or Paid?
Understand the distinction in dividend timing for tax purposes. A dividend becomes taxable income not when a company declares it, but when it is paid to you.
Investors who own stocks or mutual funds often receive dividend payments, which are a distribution of a company’s profits to its shareholders. A common question is not what a dividend is, but when the income from it becomes taxable. The timing of this tax liability depends on several key dates in the dividend payment process.
Understanding Key Dividend Dates
A dividend payment involves four dates. The declaration date is when a company’s board announces its intent to pay a dividend, creating a legal obligation for the company.
Next is the record date. An investor must be a registered shareholder on this date to receive the dividend. The ex-dividend date is typically one business day before the record date. If you buy a stock on or after its ex-dividend date, the seller receives the dividend. Stock exchanges set this date to ensure orderly trading.
Finally, the payment date is when the company disburses the funds via electronic transfer or mailed check. While all these dates are part of the process, only one determines when the dividend is taxed.
The Taxable Event and Constructive Receipt
A dividend is taxed as income in the year it is paid, not when it is declared. This follows the “constructive receipt” rule, where income is taxable once it is made available to you without restriction. You have constructively received income when you gain control over it, even without physical possession.
The payment date triggers constructive receipt because the funds are made available to the shareholder. It does not matter if you have not cashed the check or if the funds are in your brokerage account. The income is taxable for that year because the money is available to use.
For example, a dividend declared in December with a payment date in January is taxable in the new year. The declaration date is not the taxable event because it does not give the shareholder access to the funds.
How Dividends Are Reported for Tax Purposes
Shareholders receive Form 1099-DIV, “Dividends and Distributions,” from their brokerage firm or the paying company. This form details the total dividend income paid to the shareholder during the calendar year. The amounts reported are based on the payment dates that occurred within that year.
Form 1099-DIV separates dividends into categories, such as ordinary and qualified dividends. Ordinary dividends are taxed at an individual’s regular income tax rates. Qualified dividends receive more favorable tax treatment.
For a dividend to be considered “qualified,” an investor must meet a holding period requirement. Generally, 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 holding period is longer for certain preferred stocks, requiring ownership for more than 90 days during the 181-day period that begins 90 days before the stock’s ex-dividend date.
Qualified dividends are taxed at the lower long-term capital gains rates of 0%, 15%, or 20%, depending on the taxpayer’s total taxable income. For the 2025 tax year, the 0% rate applies to single filers with taxable income up to $48,350, heads of household up to $64,750, and joint filers up to $96,700.
The 15% rate applies for income above those thresholds up to $518,900 for single filers, $551,350 for heads of household, and $583,750 for joint filers. The 20% rate applies to any income exceeding these upper limits.
Dividend Reinvestment Plans (DRIPs) also follow this rule. In a DRIP, dividends automatically purchase additional shares instead of being paid in cash. Even without receiving cash, these reinvested dividends are constructively received. The amount is reported on Form 1099-DIV and is taxable in the year of reinvestment.