Qualified dividends are corporate stock payouts that get taxed at the long-term capital gains rates of 0%, 15%, or 20% rather than at your ordinary income tax rate. To earn that treatment, the dividend has to come from an eligible U.S. or foreign corporation, and you have to hold the stock for a minimum number of days around the ex-dividend date. Everything else labeled a “dividend” on your statements is generally taxed as ordinary income, at rates that top out at 37%.
2026 Tax Rates on Qualified Dividends
The rate you pay depends on your taxable income and filing status. For tax year 2026:1Internal Revenue Service. Revenue Procedure 2025-32
Single filers
- 0% on taxable income up to $49,450
- 15% from $49,451 to $545,500
- 20% above $545,500
Married filing jointly
- 0% on taxable income up to $98,900
- 15% from $98,901 to $613,700
- 20% above $613,700
Head of household
- 0% on taxable income up to $66,200
- 15% from $66,201 to $579,600
- 20% above $579,600
Married filing separately
- 0% on taxable income up to $49,450
- 15% from $49,451 to $306,850
- 20% above $306,850
These brackets sit on top of taxable income, which is your gross income minus your deductions. Even the top 20% qualified dividend rate is well below the 37% top ordinary rate that would apply to a non-qualified dividend.
The 3.8% Net Investment Income Tax
Higher earners owe an extra 3.8% net investment income tax on qualified dividends. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds:2Internal Revenue Service. Net Investment Income Tax
- $200,000 if single or head of household
- $250,000 if married filing jointly
- $125,000 if married filing separately
These thresholds are fixed and don’t adjust for inflation.3Internal Revenue Service. Questions and Answers on the Net Investment Income Tax A taxpayer in the 20% qualified dividend bracket who also owes the NIIT pays a combined federal rate of 23.8% on those dividends.
Which Companies Can Pay Qualified Dividends
Domestic corporations, meaning companies formed under the laws of any U.S. state or the District of Columbia, generally issue qualifying dividends because they’ve already paid corporate income tax on the underlying profits.4Office of the Law Revision Counsel. 26 USC 1 Tax Imposed
A foreign corporation’s dividends qualify only if one of three things is true:4Office of the Law Revision Counsel. 26 USC 1 Tax Imposed
- The company is incorporated in a U.S. possession such as Puerto Rico, Guam, or the U.S. Virgin Islands.
- The company is eligible for benefits under a comprehensive income tax treaty with the United States that includes an information-sharing program.
- The company’s stock is readily tradable on an established U.S. securities exchange such as the NYSE or Nasdaq.
Fail all three tests, and the payments are taxed as ordinary income no matter how long you hold the shares.
The Holding Period Rule
Owning the right kind of stock is only half of it. You also have to hold it long enough. The rule stops investors from buying in just before a dividend, capturing the low rate, and selling immediately after.
Common Stock
You must hold the shares for more than 60 days during the 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the first trading day when a new buyer no longer receives the upcoming dividend. Your count begins the day after purchase and includes the day you sell.4Office of the Law Revision Counsel. 26 USC 1 Tax Imposed
Preferred Stock
Preferred stock dividends covering a period longer than 366 days require holding the shares for more than 90 days during the 181-day window that starts 90 days before the ex-dividend date. If the preferred dividend covers 366 days or less, the ordinary 60-day/121-day rule applies.
Days That Don’t Count
Any day your risk of loss is reduced is stripped from the count. That covers protective puts, written calls, short positions in the same or substantially similar stock, and any contractual obligation to make payments that offset the dividend.4Office of the Law Revision Counsel. 26 USC 1 Tax Imposed
Mutual Fund Dividends
For a mutual fund or other regulated investment company, two holding tests must be met. The fund itself must have held the underlying dividend-paying stock long enough, and you must have held your fund shares for more than 60 days during the 121-day window around the fund’s ex-dividend date. If either fails, the payment is ordinary income.5IRS.gov. IRS Gives Investors the Benefit of Pending Technical Corrections on Qualified Dividends
Payments That Don’t Qualify
Several common investment payouts are excluded by law or by structure.
REITs. Real estate investment trusts pass most of their income through without paying corporate-level tax, and their distributions are typically taxed at your ordinary rate. A REIT can pass through qualified dividends only to the extent it received them from other corporations, which is uncommon.6Legal Information Institute (LII). Definition Qualified Dividend Income From 26 USC 1(h)(11)
Master limited partnerships. MLP distributions are a share of partnership income, reported on Schedule K-1 rather than Form 1099-DIV, and don’t get capital gains rates.
Passive foreign investment companies. A PFIC is generally a foreign corporation where at least 75% of income is passive or at least 50% of assets produce passive income. Foreign mutual funds usually fall into this category, and their distributions follow a separate, often harsher, set of rules.4Office of the Law Revision Counsel. 26 USC 1 Tax Imposed
Tax-exempt corporations and ESOP dividends. Payments from tax-exempt entities don’t qualify because there’s no corporate tax being paid on the underlying profits. The statute also excludes dividends paid by an employer on stock held in an employee stock ownership plan.6Legal Information Institute (LII). Definition Qualified Dividend Income From 26 USC 1(h)(11)
Credit union and bank “dividends.” Credit unions, mutual savings banks, and savings and loan associations call their payments dividends, but the IRS treats them as interest. They arrive on Form 1099-INT and are taxed as ordinary income.7Internal Revenue Service. Topic No 403 Interest Received
How Qualified Dividends Are Reported
Your broker issues Form 1099-DIV each year. Box 1a shows total ordinary dividends; Box 1b shows the portion that qualifies for the lower rates. Box 1b is always equal to or less than Box 1a.8Internal Revenue Service. Instructions for Form 1099-DIV
A broker may put a dividend in Box 1b even when it can’t confirm you met the holding period. You’re responsible for verifying that yourself before treating those amounts as qualified on your return.
On Form 1040, ordinary dividends go on line 3b and qualified dividends on line 3a.9Internal Revenue Service. Form 1040 U.S. Individual Income Tax Return With an entry on line 3a, you calculate your tax using the Qualified Dividends and Capital Gain Tax Worksheet (or the Schedule D Tax Worksheet if it applies) rather than the standard tax table.10Internal Revenue Service. Instructions for Form 1040 Tax software runs the worksheet for you.
Retirement Accounts and State Taxes
The 0%/15%/20% rates apply only in taxable brokerage accounts. Inside a traditional IRA or 401(k), dividends grow tax-deferred and every dollar comes out as ordinary income at distribution, so the qualified label is irrelevant. Roth accounts do better: qualified distributions are entirely tax-free, though non-qualified withdrawals (generally before age 59½ or before the five-year mark) are taxed as ordinary income and the earnings portion may also face a 10% early withdrawal penalty.11Internal Revenue Service. IRA FAQs – Distributions (Withdrawals)
State income tax is a separate layer. Most states that tax income treat dividends as ordinary income with no preferential rate, and state rates run from roughly 2% to over 13%. Eight states levy no individual income tax at all. In a high-tax state, the combined federal and state bite on qualified dividends can run well above the federal figure alone.