What Is the Tax Rate on Stock Dividends?

Receiving a distribution of a company’s earnings as a shareholder is a common form of investment income known as a stock dividend. These payments represent a share of the company’s profits. Understanding the tax implications of this income is part of managing investment returns, as the treatment can vary. This variability depends on several factors that determine how the dividend income is classified and taxed by federal and, in some cases, state governments.

Qualified vs. Ordinary Dividends

The U.S. tax code distinguishes between two primary types of dividends: ordinary and qualified. An ordinary dividend, sometimes called a non-qualified dividend, is taxed at an individual’s regular income tax rates, the same as wages or interest income. These can include dividends from entities like Real Estate Investment Trusts (REITs), distributions from tax-exempt organizations, or dividends on shares held for only a short time.

A qualified dividend, conversely, receives more favorable tax treatment. To be considered qualified, a dividend must meet specific criteria set by the IRS. The dividend must be paid by a U.S. corporation or a qualified foreign corporation, which includes entities from countries with an active tax treaty with the U.S. or whose stock is readily tradable on a U.S. market.

The most significant requirement is the holding period, which is designed to reward long-term investors. An investor 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 ex-dividend date is the cutoff day; an investor who buys the stock on or after this date will not receive the upcoming dividend payment.

For example, if a stock’s ex-dividend date is October 15, the 121-day window begins on August 16. To receive qualified dividend treatment, the shareholder must have owned the stock for more than 60 days within that specific timeframe. For certain preferred stocks, the holding period is extended to more than 90 days during a 181-day period.

Federal Tax Rates on Dividends

The federal tax rates applied to dividend income depend directly on whether the dividends are classified as ordinary or qualified. This distinction is the primary driver of the tax liability an investor will face on their dividend earnings. The rates for qualified dividends are lower, mirroring the tax rates for long-term capital gains.

Qualified Dividends

Qualified dividends are taxed at three potential rates: 0%, 15%, or 20%. The specific rate an investor pays is determined by their taxable income and filing status.

For the 2024 tax year, the 0% rate applies to single filers with taxable income up to $47,025 and married couples filing jointly with income up to $94,050. For the 2025 tax year, these thresholds increase to $48,350 for single filers and $96,700 for those married filing jointly.

The 15% rate for qualified dividends in 2024 applies to single filers with taxable income between $47,026 and $518,900, and for married couples filing jointly with income between $94,051 and $583,750. Any income above these upper thresholds is taxed at the 20% rate.

Ordinary Dividends

Ordinary dividends do not benefit from the lower capital gains rates. Instead, they are taxed at the same marginal tax rates that apply to an individual’s salary, wages, and other ordinary income. For the 2024 and 2025 tax years, these rates range from 10% to a top rate of 37% for the highest earners.

Net Investment Income Tax

In addition to the standard tax rates, some higher-income investors may be subject to the Net Investment Income Tax (NIIT). This is an additional 3.8% tax levied on investment income, which includes both qualified and ordinary dividends.

The NIIT applies to individuals whose modified adjusted gross income (MAGI) exceeds certain thresholds. These thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for those married filing separately. The tax is calculated on the lesser of the taxpayer’s net investment income or the amount by which their MAGI exceeds the applicable threshold.

Reporting Dividend Income on Your Tax Return

The primary document investors receive for this purpose is Form 1099-DIV, Dividends and Distributions. This form is sent by brokerage firms and other financial institutions that have paid out $10 or more in dividends during the tax year.

Information Gathering (Form 1099-DIV)

Form 1099-DIV provides a detailed breakdown of the dividend income received. Box 1a of the form shows the total amount of ordinary dividends paid to the investor. Box 1b, a subset of Box 1a, specifically reports the portion of the dividends that are considered qualified.

Procedural Action (Form 1040)

The information from Form 1099-DIV is transferred directly to the main individual income tax return, Form 1040. The total ordinary dividends from Box 1a of the 1099-DIV are reported on line 3b of Form 1040. The qualified dividends from Box 1b are reported separately on line 3a of Form 1040.

If an individual’s total dividend income exceeds $1,500, they may also need to file Schedule B, Interest and Ordinary Dividends, to provide a more detailed list of the sources of their dividend income.

Additional Dividend Tax Concepts

Beyond the primary rules for qualified and ordinary dividends, several other concepts can affect an investor’s tax situation. These include the treatment of reinvested dividends, how states tax this income, and the nature of non-dividend distributions.

Dividend Reinvestment Plans (DRIPs)

Many investors participate in Dividend Reinvestment Plans (DRIPs), where cash dividends are automatically used to purchase additional shares of the same stock. Even though the investor never receives cash, these reinvested dividends are still considered taxable income in the year they are issued.

The amount of the reinvested dividend is reported on Form 1099-DIV and increases the investor’s cost basis in the stock. This higher basis will reduce the taxable capital gain when the shares are eventually sold.

State Taxes on Dividends

The preferential federal tax rates for qualified dividends generally do not extend to state income taxes. Most states that levy an income tax treat all dividend income, whether qualified or not, as ordinary income. This means that even if a dividend is taxed at 0% or 15% at the federal level, it will be taxed at the state’s regular income tax rates.

Return of Capital

Sometimes, a corporation makes a distribution to shareholders that is not paid out of its earnings and profits. This type of payment is known as a return of capital (ROC). A return of capital is not immediately taxable as income; instead, it reduces an investor’s cost basis in their shares.

This information is reported in Box 3 of Form 1099-DIV. Once the investor’s cost basis is reduced to zero, any further distributions are treated as a taxable capital gain.