Equity income is the cash you receive from owning shares in a company or fund, most often paid out as dividends. For 2026, that income is taxed federally somewhere between 0% and 37% depending on the type of dividend, how long you held the shares, and your taxable income. Higher earners can owe an extra 3.8% on top.
Where Equity Income Comes From
The most familiar source is corporate dividends. When a company’s board decides the business has enough surplus cash, it can authorize a payment to shareholders. Common stockholders receive variable amounts tied to company performance. Preferred stockholders typically receive a fixed payment that gets priority over common shares. Boards revisit these decisions quarterly, weighing available cash against reinvestment needs and debt.
Real Estate Investment Trusts are another major source. Federal law requires a REIT to distribute at least 90% of its taxable income to shareholders, which is why REITs tend to offer higher yields than ordinary stocks. In exchange, the trust avoids paying corporate-level tax on the income it passes through.1Internal Revenue Service. Instructions for Form 1120-REIT (2025) – Section: General Requirements To Qualify as a REIT
Master Limited Partnerships work similarly in the energy and natural resources sectors. An MLP pays no entity-level tax. All income, deductions, and credits flow through to unitholders, who report their share on personal returns. That structure can mean bigger payouts, but it also brings filing complexity that ordinary stock dividends don’t.
Qualified vs. Ordinary Dividends
Not all dividends are taxed the same way, and the gap between the two categories can be as wide as 17 percentage points.
Qualified Dividends
Qualified dividends are taxed at the same preferential rates as long-term capital gains: 0%, 15%, or 20%, depending on your taxable income.2Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed For 2026, single filers with taxable income up to $49,450 pay 0% on qualified dividends. The 15% rate applies up to $545,500 for single filers and $613,700 for married couples filing jointly. Above those thresholds, the 20% rate kicks in.
To get those rates, you must hold the stock at least 61 days during the 121-day window that starts 60 days before the ex-dividend date. That holding period exists to prevent short-term traders from gaming the lower rate.2Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed The dividend also has to come from a domestic corporation or a qualifying foreign corporation. Dividends from REITs generally do not qualify.
Ordinary Dividends
Dividends that don’t meet the holding period or source requirements are taxed as ordinary income at your regular federal rate. For 2026, ordinary income rates range from 10% to 37%, with the top rate applying to taxable income above $640,600 for single filers and above $768,700 for married couples filing jointly.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Most REIT dividends fall into this ordinary category, as do dividends from certain foreign corporations and dividends on shares you held too briefly.
The 3.8% Net Investment Income Tax
On top of the regular rates, higher earners face an additional 3.8% surtax on net investment income, which includes dividends. The tax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds these thresholds:4Internal Revenue Service. Topic No. 559, Net Investment Income Tax
- $250,000 for married filing jointly or qualifying surviving spouse
- $200,000 for single or head of household
- $125,000 for married filing separately
These thresholds are not indexed for inflation, so they catch more taxpayers every year. A married couple filing jointly with $300,000 in income and $20,000 in dividends pays the 3.8% surtax on the $20,000 (the lesser of their investment income or the $50,000 excess over $250,000). That adds $760 to the tax bill on top of whatever dividend rate already applies.
Special Rules for REIT and MLP Income
The Section 199A Deduction for REIT Dividends
REIT dividends are mostly taxed as ordinary income, but a meaningful benefit partially offsets that. Under Section 199A, eligible taxpayers can deduct up to 20% of qualified REIT dividends from their taxable income.5Internal Revenue Service. Qualified Business Income Deduction The deduction was originally set to expire after 2025 but was extended as part of the broader tax legislation signed into law in 2025. A REIT dividend taxed at the 37% top rate functionally drops closer to 29.6% after the deduction, though the exact benefit depends on your filing status and income level.
MLP Filing Complexity
If you own MLP units, you won’t receive a simple 1099-DIV. You’ll get a Schedule K-1 reporting your allocated share of partnership income, deductions, and credits. K-1s frequently arrive late, sometimes after the April filing deadline, because the partnership has to close its own books first. Many MLP investors file extensions as a matter of course.
Your ability to deduct MLP losses is also restricted. Losses are limited to your adjusted basis in the partnership, subject to at-risk rules, and further constrained by passive activity rules if you don’t materially participate in the business.6Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) None of those limitations apply to ordinary stock dividends.
MLPs in Retirement Accounts
Holding MLPs inside a traditional IRA or 401(k) looks like a natural move to shelter the income, but it can backfire. When a tax-exempt account earns income from an active trade or business through a partnership, that income is classified as unrelated business taxable income. If gross UBTI for a particular IRA reaches $1,000 or more in a year, the IRA itself owes tax at trust rates (up to 37%) and must file IRS Form 990-T. The first $1,000 is exempt. Beyond that, the IRA pays the tax from its own assets, not from your personal funds.
Equity Income in Retirement Accounts
Dividends earned inside a traditional IRA or 401(k) grow tax-deferred, which sounds appealing. The catch is that when you withdraw the money in retirement, every dollar comes out taxed as ordinary income, regardless of whether the underlying dividends were qualified. You lose the preferential 0% to 20% rate entirely. For investors in lower brackets during their working years, this can mean paying a higher rate on dividends in retirement than they would have paid in a regular brokerage account.
Roth IRAs flip the equation. Dividends inside a Roth grow tax-free, and qualified withdrawals in retirement are also tax-free. If you hold high-yield dividend stocks, the Roth’s permanent tax exemption can save substantially more than the tax-deferred treatment of a traditional account. The tradeoff is that Roth contributions are made with after-tax dollars, so there’s no deduction up front.
Reinvested Dividends Are Still Taxable
Many brokerages offer dividend reinvestment plans that automatically use your cash dividends to buy additional shares. This is a powerful compounding tool, but it doesn’t change the tax picture. The IRS treats reinvested dividends exactly like cash dividends. The full amount appears on your 1099-DIV and is taxable in the year it was paid, even though the money never hit your bank account.
Each reinvestment also creates a separate tax lot with its own cost basis and purchase date. Over years of quarterly reinvestments, you can accumulate dozens of small lots, each with a slightly different basis. Keeping track of them matters when you eventually sell, because each lot’s gain or loss depends on its individual purchase price. Check that your brokerage tracks cost basis by lot rather than relying on your own records.
Reporting on Form 1099-DIV
Financial institutions report dividend payments to both you and the IRS on Form 1099-DIV.7Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions The form breaks out ordinary dividends in Box 1a and qualified dividends in Box 1b. Box 5 shows Section 199A dividends from REITs, and Box 7 shows any foreign taxes withheld. Review these boxes carefully. The IRS matches its records against yours, and discrepancies trigger automated notices.
Backup Withholding
If you haven’t provided your brokerage with a valid taxpayer identification number, or if the IRS has flagged you for prior underreporting, the payer must withhold 24% of your dividends and send it directly to the IRS.8Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide You can claim this withholding as a credit on your return, but getting it released takes time. The simplest prevention is making sure your W-9 is current with every institution that pays you dividends.
Penalties for Underreporting
Failing to report dividend income carries real consequences that escalate with severity. If the IRS determines you underreported due to negligence or a substantial understatement of tax, it imposes a civil penalty of 20% of the underpayment.9Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments At the extreme end, willfully attempting to evade tax is a felony punishable by a fine of up to $100,000 and up to five years in prison.10Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax Criminal prosecution is rare for simple omissions, but the civil penalty hits plenty of taxpayers who forget a 1099-DIV from a smaller account.
Equity Income vs. Capital Gains
These two forms of investment profit get lumped together often, but they work differently. Equity income is cash you receive while you still own the investment. Capital gains are profit you realize only when you sell an asset for more than you paid. The distinction matters because equity income provides actual liquidity, money you can spend or redirect, without requiring you to part with the underlying shares.
An investor might own a stock paying a 5% dividend yield that simultaneously drops 10% in market value. The dividend income stays positive even though the overall position is down. That separation is why income-focused investors build portfolios around dividends: the cash keeps arriving regardless of what the market does day to day.
Both qualified dividends and long-term capital gains are taxed at the same preferential federal rates of 0%, 15%, or 20%, so the tax treatment is largely parallel for patient investors.2Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed The difference shows up with ordinary dividends, which are taxed at your regular income rate, and short-term capital gains on assets held a year or less, which face the same higher rates. In both cases, the 3.8% net investment income tax may apply on top if your income exceeds the thresholds above.