How to Handle Dividend Tax in the USA

When a company distributes a portion of its earnings to shareholders, the payment is known as a dividend. This investment income is subject to U.S. federal income tax, but the specific tax treatment can vary. The Internal Revenue Service (IRS) classifies dividends into different types, which determines the tax rate applied. Understanding these distinctions is an important part of managing personal investments.

Differentiating Dividend Types for Tax Purposes

The tax on dividend income primarily depends on its classification as either qualified or ordinary. This status is determined by IRS criteria and directly impacts the tax rate. Qualified dividends benefit from lower tax rates, similar to those for long-term capital gains, making them more favorable for investors.

For a dividend to be qualified, it must meet two conditions. The first is that the dividend must be paid by a U.S. corporation or a qualified foreign corporation. A foreign corporation qualifies if it is in a U.S. possession, is eligible for benefits under a U.S. income tax treaty, or its stock is tradable on a U.S. securities market.

The second requirement is the holding period. An investor must own the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the cutoff that determines who receives the dividend. This holding period must be met within a specific window surrounding that date. For certain preferred stocks, this period is extended to more than 90 days during a 181-day window.

Any dividend that fails to meet these criteria is classified as an ordinary dividend, also known as a non-qualified dividend. This can happen if the holding period is not met or the dividend is from a non-qualified payer, like certain Real Estate Investment Trusts (REITs). Ordinary dividends are taxed at the investor’s regular income tax rates.

Applicable Tax Rates and Calculations

For qualified dividends, the tax rates are 0%, 15%, or 20%, depending on the taxpayer’s income and filing status. For the 2025 tax year, the 0% rate applies to single filers with taxable income up to $48,350 and married couples filing jointly with income up to $96,700. The 15% rate applies to single filers with income up to $533,400 and married couples with income up to $600,050. The 20% rate is for taxpayers with income exceeding those thresholds.

Ordinary dividends are taxed at the same marginal rates as other ordinary income, such as wages or salaries. For the 2025 tax year, these rates range from 10% to 37%, depending on the taxpayer’s total income and filing status. This results in a higher tax rate on ordinary dividends compared to qualified dividends for most investors.

Higher-income taxpayers may also be subject to the Net Investment Income Tax (NIIT), an additional 3.8% tax on investment income, including dividends. The NIIT applies if a taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds certain thresholds. These are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Reporting Dividend Income on Your Tax Return

Investors report dividend income using information from IRS Form 1099-DIV, “Dividends and Distributions.” This form is sent by brokerage firms or paying entities and details the distributions paid during the year. You will receive this form if you earned at least $10 in dividends.

Form 1099-DIV separates different types of payments. Box 1a shows total ordinary dividends, while Box 1b reports the portion of that total that is qualified. Box 2a lists total capital gain distributions, and Box 3 shows nondividend distributions, which are a return of capital.

The figures from Form 1099-DIV are transferred to your U.S. Individual Income Tax Return, Form 1040. Total ordinary dividends from Box 1a are reported on Line 3b of the Form 1040. The qualified dividends from Box 1b are reported on Line 3a, allowing them to be taxed at the correct lower rates.

If your total ordinary dividend income for the year is over $1,500, you must also file Schedule B, “Interest and Ordinary Dividends.” This schedule requires you to list the source of each dividend payment you received during the year.

Tax Treatment of Special Distributions

Investors may receive other distributions with unique tax consequences, which are also reported on Form 1099-DIV. These are handled differently from standard ordinary or qualified dividends.

Capital Gain Distributions

Mutual funds and ETFs often distribute net gains from selling securities in their portfolios. These capital gain distributions are reported in Box 2a of Form 1099-DIV. They are taxed as long-term capital gains, receiving the same 0%, 15%, or 20% tax rates as qualified dividends, regardless of how long you have owned the fund shares.

Nondividend Distributions (Return of Capital)

A distribution not paid from a company’s earnings and profits is a “return of capital,” reported in Box 3 of Form 1099-DIV. This payment is not taxable income when received. Instead, it reduces your cost basis in the stock, which is the investment’s original value for tax purposes, and will result in a larger capital gain or smaller loss when you sell the shares.

Dividends from Foreign Corporations

Dividends from foreign corporations may be taxed as qualified dividends if the company is in a country with a U.S. income tax treaty. If foreign taxes were withheld from the payment, you may be able to claim a foreign tax credit by filing Form 1116. This credit helps prevent double taxation on the same income.

REIT Dividends

Dividends from Real Estate Investment Trusts (REITs) usually do not receive the lower tax rates for qualified dividends and are taxed as ordinary income. However, a portion of these dividends may be eligible for the Qualified Business Income (QBI) deduction. This allows taxpayers to deduct up to 20% of their qualified REIT dividends, which lowers the effective tax rate.