Dividends are taxed one of two ways at the federal level. Qualified dividends get the long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income and filing status. Ordinary dividends are taxed at your regular income tax rate, which runs from 10% to 37% for 2026. Higher-income investors may owe an additional 3.8% net investment income tax on top of either rate.
Ordinary vs. Qualified Dividends
Every cash distribution a corporation pays on its stock starts out as ordinary. It stays that way unless it passes two extra tests: it must come from a U.S. corporation or a qualifying foreign corporation, and you must hold the stock long enough around the payment date. Meet both, and the dividend gets taxed at the lower capital-gains rates instead of your regular income rate.
A foreign corporation counts as qualifying if it’s incorporated in a U.S. possession, if the stock trades on an established U.S. securities market, or if the company is eligible for benefits under a comprehensive income tax treaty with the United States.1Office of the Law Revision Counsel. 26 USC 1(h) – Tax Imposed – Section: Maximum Capital Gains Rate
Some distributions never qualify no matter how long you hold. Dividends from real estate investment trusts, money market funds, tax-exempt organizations, and farmer cooperatives are almost always taxed as ordinary income. Your brokerage sorts the two categories on your year-end forms, but the classification affects what you actually owe.
The Holding Period Requirement
You must own the shares for more than 60 days during the 121-day window that begins 60 days before the ex-dividend date.1Office of the Law Revision Counsel. 26 USC 1(h) – Tax Imposed – Section: Maximum Capital Gains Rate The ex-dividend date is the first trading day when new buyers are no longer entitled to the upcoming payment.
Your holding period starts the day after you buy the shares and includes the day you sell them. Fall short, and the dividend is reclassified as ordinary income automatically. This is the trap for investors who buy right before a dividend and sell shortly after. If you trade actively, verify the dates yourself before assuming a payout qualifies.
2026 Qualified Dividend Tax Rates
Qualified dividends fall into one of three rate bands set by Revenue Procedure 2025-32:2IRS. Rev. Proc. 2025-32
- 0% for taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% for taxable income above those amounts but not exceeding $545,500 (single), $613,700 (joint), or $579,600 (head of household).
- 20% for taxable income above the 15% ceiling.
A married couple filing jointly with $90,000 in total taxable income pays zero federal tax on their qualified dividends. The same couple at $400,000 pays 15%. A single filer at $600,000 pays 20%. The gap between these rates and the ordinary brackets is why the qualified-dividend rules matter.
Rates on Ordinary (Non-Qualified) Dividends
Ordinary dividends stack on top of your other taxable income and run through the standard progressive brackets. For 2026, those rates range from 10% to 37%.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The bracket floors for single filers and married couples filing jointly:
- 10% on income up to $12,400 (single) or $24,800 (joint).
- 12% over $12,400 / $24,800.
- 22% over $50,400 / $100,800.
- 24% over $105,700 / $211,400.
- 32% over $201,775 / $403,550.
- 35% over $256,225 / $512,450.
- 37% over $640,600 / $768,700.
Because ordinary dividends pile on top of your other income, a big distribution can push some of your earnings into a higher bracket. A single filer earning $100,000 in wages who receives $10,000 in ordinary dividends effectively pays 24% on those dividends. If the same $10,000 qualified, the rate would be 15%.
The 3.8% Net Investment Income Tax
Higher-income taxpayers owe an additional 3.8% on investment income, including both ordinary and qualified dividends. The surtax applies once your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married couples filing jointly, or $125,000 for married individuals filing separately.4Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax These thresholds are not indexed for inflation and haven’t changed since 2013.5Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
The 3.8% applies to the lesser of your net investment income or the amount by which your modified AGI exceeds the threshold. A single filer earning $230,000 with $40,000 of investment income pays the tax on $30,000, because that’s less than the $40,000 of investment income. That adds $1,140 to whatever rate already applies to the dividends themselves.
Situations Where the Standard Rules Don’t Apply
REIT Dividends
Most real estate investment trust dividends are taxed as ordinary income rather than qualifying for the capital-gains rates. A 20% deduction under Section 199A softens the hit: on $1,000 of qualified REIT dividends, you deduct $200 and only $800 is taxed at your ordinary rate.6Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income The deduction was recently made permanent.
Return of Capital
Sometimes a company returns part of your original investment rather than paying a true dividend. Return-of-capital payments appear in Box 3 of Form 1099-DIV and aren’t taxable when received. They reduce your cost basis in the stock, so you owe more in capital gains when you sell. Once basis hits zero, any further distributions are taxed as capital gains.
Foreign Dividends
Dividends from foreign companies often have tax withheld by the country where the company is based. You can generally claim a credit for that foreign tax on your U.S. return, either directly on Form 1040 for small amounts or by filing Form 1116. To claim the credit, you must have held the stock for at least 16 days within the 31-day period beginning 15 days before the ex-dividend date.7Internal Revenue Service. Instructions for Form 1116 (2025) The foreign tax withheld typically shows in Box 7 of Form 1099-DIV.
Capital Gain Distributions From Funds
Mutual funds and ETFs sometimes pass through capital gains to shareholders, reported in Box 2a of Form 1099-DIV. These count as long-term capital gains regardless of how long you’ve held the fund shares and are taxed at the same 0%/15%/20% rates as qualified dividends.8Internal Revenue Service. Instructions for Form 1099-DIV
Reinvested Dividends
If your dividends automatically buy more shares through a reinvestment plan, you still owe tax on the full amount in the year it was paid. The IRS treats reinvested dividends identically to cash dividends. The reinvested amount becomes your cost basis in the new shares.
Credit Union “Dividends”
Credit unions call their deposit earnings dividends, but the IRS treats them as interest income. They appear on Form 1099-INT, not 1099-DIV, and follow the rules for interest.9Internal Revenue Service. 1099-DIV Dividend Income
Dividends Inside Retirement Accounts
Dividends earned inside a traditional IRA or 401(k) aren’t taxed in the year received. They grow tax-deferred, and you pay ordinary income tax on withdrawals in retirement. The ordinary-vs-qualified distinction doesn’t matter inside these accounts because everything comes out taxed the same way.10Internal Revenue Service. 401(k) Plans
Roth IRAs and Roth 401(k) accounts go further. Qualified distributions from a Roth are entirely tax-free, so dividends earned inside are never taxed if you meet the withdrawal requirements (generally age 59½ and a five-year holding period).11Internal Revenue Service. Roth IRAs
Dividends Paid to a Child
A child’s unearned income above $1,350 for 2026 is taxed at the parent’s marginal rate rather than the child’s own rate.2IRS. Rev. Proc. 2025-32 The rule blocks families from shifting large portfolios into a child’s name to exploit lower brackets. If the child’s total gross income is between $1,350 and $13,500, you can elect to include it on your own return instead of filing separately for the child.
Reporting Dividends on Your Tax Return
Each brokerage that paid you dividends sends a Form 1099-DIV, typically by early February.12Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions The boxes that matter for figuring your tax:
- Box 1a shows total ordinary dividends, which is the larger figure that includes any qualified portion.
- Box 1b shows the portion of Box 1a that qualifies for the lower rates.
- Box 2a shows capital gain distributions from funds.
- Box 3 shows nondividend distributions (return of capital).
- Box 7 shows foreign tax paid, which may be creditable.
Transfer the Box 1a total to the appropriate line on Form 1040. If your total ordinary dividends from all sources exceed $1,500, you also need to complete Schedule B, which lists each payer and amount.13Internal Revenue Service. 2025 Instructions for Schedule B (Form 1040) The IRS receives a copy of the same 1099-DIV, so any mismatch will trigger an automated notice.
State Taxes on Dividends
Most states with an income tax treat dividends as ordinary income and tax them at the same rates as wages. State rates run from zero in states without an individual income tax to over 13% in the highest-tax states. Only a few states offer a preferential rate for investment income. Combined federal and state taxes on ordinary dividends can exceed 50% for top earners in high-tax jurisdictions, so check your state’s rate before assuming the federal figure is the whole story.