Dividends can be taxed at either ordinary income tax rates or at the lower long-term capital gains tax rates. Dividends that qualify for long-term capital gains tax rates are referred to as "qualified dividends." Ordinary income tax rates range from 10% and 37%, while the long-term capital gains tax rate is capped at 20%.
Key Takeaways
- Dividends can be taxed as ordinary income or at a lower long-term capital gains tax rate depending on whether they are qualified dividends.
- A qualified dividend is one that you hold or own for more than 60 days during a 121-day period that begins 60 days before the ex-dividend date.
- Mutual fund companies, brokers, and corporations should issue you a Form 1099-DIV after the end of the tax year, telling you (and the IRS) the amount of your qualified dividends.
- You'll have to file Schedule B with your tax return if you have more than $1,500 in interest income and dividends.
Dividends and Qualified Dividends
Dividends are a type of investment income that's earned from stocks and mutual funds that contain stocks. They're a share of corporate profits that are paid out to investors. They're taxable income.
Your dividends are considered "qualified" if you hold or own the stock for more than 60 days during a 121-day period that begins 60 days before the ex-dividend date. Ordinary dividends are more common. They are usually designated as such.
Note
The holding period can be longer for preferred stock. These assets must be held for more than 91 days during a 181-day period that begins 90 days before the ex-dividend date. This rule applies if the dividends result from time periods of 367 days or more.
Capital Gains Tax Rates for Qualified Dividends
When you earn a dividend on an investment, you have to pay the capital gains tax on it.
You'll fall into the 0% long-term capital gains tax rate for qualified dividends if your income meets the following thresholds for tax year 2022, the return you file in 2023:
- Less than $41,675 if you're single
- Less than $83,350 if you're married and you file a joint return with your spouse
- Less than $55,800 if you qualify as head of household
The 15% tax bracket kicks in at incomes above the 0% thresholds above and applies to incomes of up to:
- $459,750 for single filers
- $517,200 for married filers of joint returns
- $488,500 for head of household filers
Only taxpayers with incomes in excess of these 15% thresholds are faced with the 20% capital gains tax rate.
For 2023, the income thresholds for the tax rates of 0%, 15%, and 20% range from $44,625 for single filers to $553,850 for married taxpayers filing jointly. The IRS outlines the details in Revenue Procedure 2022-38.
Note
Ordinary dividends are taxed as ordinary income according to a taxpayer's regular, marginal tax bracket and rate.
Other Types of Dividends
Ordinary dividends are taxed at the same rates as your salary, wages, or other earned income.
You might also receive dividends from a trust or an estate, from an S-corporation, or from a partnership. The transaction still represents dividends. The value must be reported on your tax return, regardless of whether the corporation or partnership pays you in cash, stock options, or tangible property. You should receive Schedule K-1 for dividends from these sources.
All other dividends are reported on Form 1099-DIV.
Reporting Dividend Income: Form 1099-DIV
Form 1099-DIV is issued to investors by mutual fund companies, brokers, and corporations when $10 or more in dividend income is paid out during the year. Form 1099-DIV reports dividends in the following places:
- Box 1a: Ordinary dividends reflecting the total amount of dividends paid to you
- Box 1b: Qualified dividends (the portion of total dividends that qualify for the preferred capital gains tax rate)
- Box 3: Non-dividend distributions, which are a nontaxable return of capital
You can elect to have taxes withheld from your dividends. These amounts should appear in box 4.
Reporting Dividend Income on Tax Form 1040
Report dividend income on your 2022 tax return—Form 1040—in the following places:
- Ordinary dividends arereported on Line 3b
- Qualified dividends arereported on Line 3a
You can use the Qualified Dividends and Capital Gain Tax Worksheet found in the instructions for Form 1040 to figure out the tax on qualified dividends at the preferred tax rates.
Non-dividend distributionscan reduce your cost basis in the stock by the amount of the distribution.
You must report dividend income on your tax return even if you don't receive a Form 1099-DIV for some reason. Dividends are taxable regardless. They must be reported even if you reinvest them, buying more stock.
Using Schedule B
Schedule B is a supplemental tax form used to list interest and dividend income from multiple sources. Using Schedule B is required if you have over $1,500 in interest income and dividends.
Part I details taxable interest earned. Part II pertains to ordinary dividends.
Tip
It can be helpful to use the form to tally up your interest and dividends for reporting on Form 1040, even if you're not required to file the form with your tax return.
The Additional Medicare Surcharge
Dividend income can also prompt the Additional Medicare Tax. It's in addition to any income tax you might pay on your dividends.
You must pay 0.9% of your net investment income toward this Medicare tax if you're married filing jointly and your modified adjusted gross income (MAGI) is $250,000 or more. You must pay it if you're married filing separately and your MAGI is more than $125,000. The income threshold for all other taxpayers is $200,000.
The Net Investment Income Tax
The Net Investment Income Tax is a heartier 3.8%. It kicks in at the income thresholds of your net investment income, or at the same income limits as the Additional Medicare Tax, whichever is less.
All taxable dividends are investment income, even if they're taxed at ordinary rates.
Warning
Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice. It's not a substitute for tax advice.
Frequently Asked Questions (FAQs)
How are dividends taxed by states?
Most states tax dividends as normal income, so you'll pay the same rate on dividends as you do on the rest of your income. New Hampshire taxes all dividends at 5%, regardless of income level. But this tax is being phased out. It should be entirely repealed by Jan. 1, 2027.
How often are dividends paid?
Aside from real estate investment trusts (REITs), most businesses have a lot of freedom as to how often they pay out dividends, when they choose to do so, and how much that payment will be. Many companies that offer dividends do so quarterly. But this isn't a requirement. They can change their plans at any time up until the dividend is announced.
What are Section 199A dividends?
Section 199A dividends are dividends paid by real estate investment trusts (REITs). Individual taxpayers can deduct up to 20% of qualified dividends from domestic REITs and income from public partnerships.
