How Much Dividend Income Is Tax Free?

Receiving payments from investments, known as dividends, is a common way for individuals to generate income. This income is subject to taxation, and the amount of tax owed can differ based on several factors. The tax treatment depends on the specific characteristics of the dividend and the investor’s overall financial picture. Understanding these distinctions is an important step for any investor looking to manage their tax obligations.

Differentiating Dividend Types

The tax code separates dividends into two main categories: qualified and non-qualified, also called ordinary dividends. For a dividend to be considered “qualified” and receive preferential tax treatment, it must meet specific criteria. Primarily, the dividend must be paid by a U.S. corporation or a qualified foreign corporation. A foreign company is qualified if its stock is readily tradable on a U.S. securities market or if it is eligible for benefits under a U.S. income tax treaty.

A requirement for dividends to be classified as qualified relates to the holding period of the stock. For common stock, the investor must have held the shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is when the stock trades without the right to the upcoming dividend. For preferred stock, the holding period is longer, requiring the investor to hold the shares for more than 90 days during a 181-day period that starts 90 days before the ex-dividend date.

Dividends that fail to meet these tests are categorized as non-qualified or ordinary dividends. This category includes payments from sources explicitly excluded from the qualified definition, such as dividends from real estate investment trusts (REITs) and master limited partnerships (MLPs). Other examples include dividends paid on deposits in credit unions and banks, special one-time dividends, and payments from employee stock options.

Tax Rates for Qualified Dividends

Qualified dividends are taxed at the same lower rates as long-term capital gains, which can result in a lower tax bill. These rates are 0%, 15%, and 20%, and the specific rate an individual pays is determined by their taxable income. Many investors can have their qualified dividend income be tax-free if their total taxable income falls below certain thresholds.

For the 2025 tax year, the 0% rate on qualified dividends applies to individuals whose taxable income is below specific levels. For those with a Single or Married Filing Separately status, this threshold is $48,350. For Married Filing Jointly or Qualifying Surviving Spouse filers, the income threshold is $96,700. Head of Household filers can have taxable income up to $64,750 and pay 0% on their qualified dividends.

If an individual’s taxable income exceeds these 0% thresholds, their qualified dividends are taxed at either 15% or 20%. For the 2025 tax year, the 15% rate applies to taxable income up to the following amounts:

• Single: $533,400
• Married Filing Jointly: $600,050
• Head of Household: $566,700
• Married Filing Separately: $300,000

Any qualified dividend income that falls into taxable income levels above these amounts is taxed at 20%.

To illustrate, consider a single filer with $40,000 in taxable income, which includes $5,000 of qualified dividends. Since their total taxable income of $40,000 is below the $48,350 threshold for single filers, the entire $5,000 of qualified dividends would be taxed at the 0% rate. This means no federal income tax is due on that dividend income.

Tax Treatment of Non-Qualified Dividends

Dividends that do not meet the criteria to be qualified are non-qualified or ordinary dividends. These distributions are not eligible for the favorable long-term capital gains tax rates. Instead, non-qualified dividends are taxed at an individual’s ordinary income tax rates, the same rates that apply to income like wages and salaries.

The ordinary income tax brackets are progressive, meaning the rate increases as income rises. For the 2025 tax year, these rates range from 10% to 37%. This means the tax on non-qualified dividends can be substantially higher than on qualified dividends. For example, an investor in the 24% marginal tax bracket would pay 24% on their ordinary dividends, while their qualified dividends would likely be taxed at 15%.

Income from sources such as money market accounts, certain foreign corporations not covered by a tax treaty, or stocks held for a very short period will be taxed at these higher ordinary income rates. The tax difference between qualified and non-qualified dividends can have a noticeable impact on an investor’s total return.

Additional Tax Considerations

Net Investment Income Tax (NIIT)

Certain high-income investors may be subject to an additional tax on their dividend income. The Net Investment Income Tax (NIIT) is a 3.8% surtax that applies to the investment income of individuals, estates, and trusts with income above certain thresholds. This tax applies to the lesser of the individual’s net investment income or the amount by which their modified adjusted gross income (MAGI) exceeds the statutory threshold.

The MAGI thresholds for the NIIT are $200,000 for Single and Head of Household filers, $250,000 for Married Filing Jointly, and $125,000 for Married Filing Separately. Net investment income includes dividends, interest, capital gains, and rental and royalty income. If an individual’s income surpasses these levels, their dividend income could be subject to this additional 3.8% tax.

The Kiddie Tax

Another rule that can affect the taxation of dividends is the “Kiddie Tax.” This provision applies to the unearned income, including dividends, of children under a certain age to prevent parents from shifting assets to them to take advantage of a child’s lower tax bracket. For 2025, the first $1,350 of a child’s unearned income is tax-free, and the next $1,350 is taxed at the child’s rate. Any unearned income above $2,700 is taxed at the parents’ higher marginal tax rate. This rule applies to children under 19 or full-time students under 24.

Reporting Dividend Income

Taxpayers receive a summary of their dividend income on Form 1099-DIV, “Dividends and Distributions,” from the financial institution that manages their investments. This form is mailed by January 31 of the year following the tax year in which the dividends were paid. The form details the different types of distributions received, making it easier to report them correctly.

Key boxes on Form 1099-DIV provide the figures needed for tax filing. Box 1a shows the total amount of ordinary dividends, which includes both qualified and non-qualified dividends. Box 1b breaks out the portion of the total that is considered qualified dividends. These figures are then transferred to the taxpayer’s Form 1040.

The amount from Box 1b (qualified dividends) is reported on line 3a of Form 1040, while the total ordinary dividends from Box 1a are reported on line 3b. If the total ordinary dividend income for the year exceeds $1,500, the taxpayer must also complete and attach Schedule B, “Interest and Ordinary Dividends,” to their tax return. This schedule requires an itemized list of the sources of all dividend income.