What Are the Federal Tax Rates on Qualified Dividends?
Explore how certain dividend income qualifies for lower tax rates than ordinary income, based on holding periods and income thresholds that affect your liability.
A dividend is a payment companies make to distribute a portion of their earnings to shareholders. The United States tax code offers preferential treatment for certain payments, known as qualified dividends. This distinction impacts the amount of federal tax owed on investment income. Understanding the difference between qualified and ordinary dividends, and the specific tax rates that apply, is a fundamental part of managing investment returns.
What Makes a Dividend Qualified
For a dividend to receive preferential tax treatment, it must meet specific criteria set by the Internal Revenue Service (IRS). The first requirement relates to the source of the payment. The dividend must be paid by a U.S. corporation or a qualified foreign corporation. A foreign corporation generally meets this standard if it is incorporated in a U.S. possession, is eligible for benefits of a comprehensive income tax treaty with the United States, or its stock is readily tradable on an established U.S. securities market.
A holding period must also be satisfied. An investor must have held the underlying 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 deadline by which an investor must own the stock to receive the upcoming dividend payment. This rule is designed to prevent investors from buying a stock just before the dividend is paid and selling it immediately after to capture the dividend at a lower tax rate.
Certain types of payments are explicitly excluded from being treated as qualified dividends. These include:
- Dividends received from credit unions, mutual savings banks, and tax-exempt organizations.
- Capital gain distributions from mutual funds and real estate investment trusts (REITs).
- Payments in lieu of dividends, which can occur in short-sale transactions.
Federal Tax Rates and Income Thresholds
A dividend classified as “qualified” is taxed at lower long-term capital gains tax rates. For the 2024 tax year, there are three tax rates for qualified dividends: 0%, 15%, and 20%. The specific rate an individual pays depends on their taxable income and filing status.
- 0% Rate: This rate applies to taxpayers who pay no federal income tax on their qualified dividends. For 2024, this includes single filers with taxable income up to $47,025, married couples filing jointly with income up to $94,050, and heads of household with income up to $63,000.
- 15% Rate: The majority of taxpayers fall into this bracket. It applies to taxable incomes above the 0% threshold up to $518,900 for single filers, $583,750 for married couples filing jointly, and $551,350 for heads of household.
- 20% Rate: The highest rate applies to taxpayers with incomes exceeding the 15% bracket thresholds. For 2024, this includes single filers with taxable income over $518,900, married couples filing jointly with income over $583,750, and heads of household with income over $551,350.
Tax Treatment of Ordinary Dividends
Dividends that fail to meet the criteria to be “qualified” are categorized as ordinary, or non-qualified, dividends. These payments are taxed at an individual’s regular marginal income tax rates instead of the lower long-term capital gains rates. These are the same tax brackets that apply to income sources like wages and salaries, which for 2024 range from 10% to 37% depending on total taxable income and filing status.
The Net Investment Income Tax and Reporting
Higher-income taxpayers may be subject to an additional 3.8% tax on their investment income, including qualified dividends, known as the Net Investment Income Tax (NIIT). This tax applies to the lesser of a taxpayer’s net investment income or the amount by which their modified adjusted gross income (MAGI) exceeds certain thresholds. The MAGI thresholds are $200,000 for single filers and heads of household, and $250,000 for married couples filing jointly. This tax is calculated on Form 8960.
Taxpayers receive information about their dividend income on Form 1099-DIV, “Dividends and Distributions,” from the paying institution. This form breaks down the total dividends paid into different categories. Total ordinary dividends are reported in Box 1a, and the portion of those dividends that are considered qualified is listed in Box 1b.