Ordinary dividends are corporate distributions of cash, stock, or property paid to shareholders out of company profits, and they are taxed at the same federal rates as your wages: 10% to 37% for the 2026 tax year.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Every dividend a corporation pays starts out as an ordinary dividend, to the extent the company has earnings and profits to support it.2Office of the Law Revision Counsel. 26 USC 316 – Dividend Defined Some of those payments then qualify for a much lower tax rate; the rest do not, and that split is what most affects your bill.
Ordinary vs. Qualified Dividends
All qualified dividends are ordinary dividends. Qualified is a subset, not a separate category. The dividends that stay in the plain ordinary bucket, called nonqualified, are taxed at your regular income tax rate. The ones that meet the qualified requirements are taxed at long-term capital gains rates of 0%, 15%, or 20%.
A dividend qualifies only if two conditions are met. The dividend must come from a domestic corporation or a qualifying foreign corporation, and you must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.3Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Buy a stock right before its ex-dividend date and sell shortly after, and the dividend almost always fails the holding test and lands at your full marginal rate.
You do not have to sort this out yourself. Your brokerage decides which of your dividends met the requirements and reports the totals on Form 1099-DIV: Box 1a shows total ordinary dividends, and Box 1b shows the qualified portion, which is already included in the Box 1a figure.4Internal Revenue Service. Instructions for Form 1099-DIV (01/2024) – Section: Specific Instructions
How Much Tax You’ll Owe
Nonqualified ordinary dividends are added to your other income (wages, interest, self-employment earnings) and taxed at the same marginal rates. For 2026 those federal rates run from 10% to 37%.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Take a single filer in the 24% bracket (taxable income over $105,700). A $1,000 nonqualified ordinary dividend adds about $240 to that person’s federal tax. If the same $1,000 qualified for the 15% capital gains rate, it would cost $150. That gap of $90 on a single payment compounds across a portfolio and across years.
The 3.8% Net Investment Income Tax
Higher earners owe an extra 3.8% Net Investment Income Tax on their dividends. The NIIT applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds these thresholds:5Internal Revenue Service. Topic No. 559, Net Investment Income Tax
- $200,000 for single or head-of-household filers
- $250,000 for married couples filing jointly
- $125,000 for married couples filing separately
Both ordinary and qualified dividends count as net investment income for NIIT purposes. The thresholds are set by statute and are not indexed for inflation, so more taxpayers cross them each year.6Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
A 20% Deduction for REIT Dividends
Real estate investment trusts pass most of their income directly to shareholders without paying corporate-level tax, so their dividends usually fail the qualified-dividend test. In exchange, Section 199A lets you deduct up to 20% of qualified REIT dividends from your taxable income.7Internal Revenue Service. Qualified Business Income Deduction The REIT piece is not subject to the wage or capital limits that apply to other pass-through business income. On $1,000 in REIT dividends for a taxpayer in the 24% bracket, the deduction removes $200 from taxation and saves $48.
The Section 199A deduction was originally set to expire after 2025 but was made permanent by the One, Big, Beautiful Bill Act.
Foreign Dividends
Foreign corporations may have taxes withheld on their dividends by the government where they operate. You can generally claim either a foreign tax credit or an itemized deduction for what you paid, but not both, and the choice applies to all your foreign taxes for the year. The credit is usually the better option because it reduces your U.S. tax dollar for dollar, up to a limit.8Internal Revenue Service. Foreign Tax Credit for Individuals
Claiming the credit normally means filing Form 1116. A simplified exception lets you skip that form if your only foreign-source income is passive (such as dividends), all of it is reported on a Form 1099-DIV, and your total foreign taxes were $300 or less, or $600 or less for joint filers.8Internal Revenue Service. Foreign Tax Credit for Individuals
When a Payment Isn’t Really a Dividend
If a corporation has already distributed all of its current and accumulated earnings and profits, additional payments are treated as a return of capital, not income. That portion is not taxable in the year received. It reduces your cost basis in the stock instead.9Office of the Law Revision Counsel. 26 USC 301 – Distributions of Property
A lower basis produces a larger taxable gain when you sell. Once return-of-capital distributions reduce your basis to zero, anything further is treated as capital gain.9Office of the Law Revision Counsel. 26 USC 301 – Distributions of Property Return-of-capital amounts typically appear in Box 3 of your 1099-DIV, separate from ordinary dividends in Box 1a.
Reinvested Dividends Are Still Taxable
Dividend reinvestment plans (DRIPs) automatically use your dividend payments to buy more shares, so you never see the cash. The IRS still treats the reinvested amount as taxable income in the year it is paid, and you report it just like a cash dividend.10Internal Revenue Service. Stocks (Options, Splits, Traders) 2 If a DRIP lets you buy shares below their fair market value, you also owe tax on the discount.
Dividends Inside a Retirement Account
None of the rules above apply while your shares sit inside a tax-advantaged retirement account. In a traditional 401(k) or traditional IRA, dividends accumulate tax-deferred; you pay ordinary income tax only when you withdraw funds. In a Roth 401(k) or Roth IRA, dividends grow tax-free and qualified withdrawals are not taxed at all. The ordinary-versus-qualified distinction does not matter inside the account because no current-year tax is due on any dividends earned there.
Reporting Ordinary Dividends
Your brokerage or the paying corporation sends a Form 1099-DIV for any account that paid at least $10 in dividends during the year.4Internal Revenue Service. Instructions for Form 1099-DIV (01/2024) – Section: Specific Instructions The boxes to check are:
- Box 1a, total ordinary dividends
- Box 1b, the qualified portion (already included in Box 1a)
- Box 3, return-of-capital distributions
If you have accounts at more than one institution, add the Box 1a amounts from all your 1099-DIVs. Report the total on line 3b of Form 1040.11Internal Revenue Service. 1099 DIV Dividend Income If your ordinary dividends exceed $1,500, you must also complete Schedule B (Form 1040), listing each payer’s name and amount.12Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends The IRS gets copies of your 1099-DIVs from your financial institutions and will flag any mismatch, so keep the forms with your tax records.