How Are Dividends Taxed? Your Guide to Qualified vs. Ordinary Rates

Dividend tax rates depend primarily on whether your payments are classified as qualified or ordinary income. Qualified dividends are taxed at preferential long-term capital gains rates of 0%, 15%, or 20%, providing significant tax savings for long-term investors.

In contrast, ordinary dividends are treated as regular income and taxed at your standard marginal tax bracket, which can reach as high as 37%. To qualify for the lower rates, you must meet specific IRS holding period requirements. For common stock, that means owning the shares more than 60 days during a 121-day window around the ex-dividend date, per IRS Publication 550.

This guide breaks down the tax year 2026 brackets (for returns filed in 2027) and strategies to help you minimize your tax liability. The IRS hasn't yet released official tax year 2027 thresholds, CBS News reports, and we'll update this guide when it does. If you're already facing a high tax bill from investment income, comparing the best tax relief services can help you find professional assistance to manage what you owe.

Dividends are a portion of corporate earnings that some companies pay out to their shareholders. These payments are taxable income, but the amount you owe the IRS depends on whether you have qualified dividends or ordinary dividends.

IRS Topic 404 describes dividends as distributions of a corporation's earnings and profits, mostly paid in cash but sometimes in stock or other property. Topic 404 adds that mutual funds, ETFs, and money market funds also pay dividends, passing through income from the investments they hold.

"From a tax perspective, qualified dividends are taxed at lower preferential rates (specifically, long-term capital gains tax rates), while ordinary dividends are taxed at higher marginal rates," says Ryan Firth, certified public accountant and founder of Mercer Street, a financial and tax services firm.

What Are Qualified Dividends?

Qualified dividends are paid on stock you hold for a specific period of time (the "holding period") surrounding the ex-dividend date. Per the IRS Form 1099-DIV instructions, that's the first day a buyer of the stock is no longer entitled to the upcoming dividend. Qualified dividends get taxed at the more favorable long-term capital gains tax rate.

• Qualified dividends must be paid by a U.S. company or qualified foreign corporation, generally one traded on a U.S. market or eligible for treaty benefits.

• Common stocks must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

• Preferred stocks must be held more than 90 days in the 181-day window starting 90 days before the ex-dividend date.

• That preferred stock rule applies only to dividends covering periods totaling more than 366 days; otherwise, the 61-day rule applies.

How Do You Count the Holding Period?

Per IRS Publication 550, count your days held in the 121-day window, including the day you sold but not the day you bought. For common stock, you need more than 60 of those days.

Here's a hypothetical example. Say a stock's ex-dividend date is Monday, March 16, 2026, so the 121-day window runs Jan. 15 through May 15. You buy on Friday, March 13, so your count starts March 14.

Sell on May 12 and you've held 60 days, one short, so the dividend is taxed as ordinary income. Sell on May 13 and you reach 61 days, so the dividend can qualify.

*Assumes a qualifying U.S. payer and a single filer with $80,000 of tax year 2026 taxable income, before state tax. That income sits in the 22% ordinary and 15% qualified brackets shown below.

Days when your risk of loss was reduced, such as while holding a put option on the stock, don't count, the publication adds.

What Are Ordinary Dividends?

Ordinary dividends are paid on stock that doesn't meet the criteria for qualified dividends. They get taxed at the ordinary income rate for your tax bracket.

Whether a dividend is qualified depends partly on how long you held the shares around each ex-dividend date. A dividend that's already been paid can't later become qualified.

Other types of ordinary dividends include:

• Most dividends from real estate investment trusts (REITs)

• Money market fund distributions, which are reported as dividends but count as qualified only to the extent your 1099-DIV shows them in box 1b

• Dividends from a tax-exempt organization or farmer's cooperative

• Dividends paid for employer securities held in an employee stock ownership plan (ESOP)

• Dividends that you are obligated to make payments for positions in similar or related property

• Payments in lieu of dividends when you know they are not qualified

• Payments from a foreign corporation when you know they are not qualified

So-called "dividends" on bank and credit union deposits are actually interest and are reported on Form 1099-INT, according to the IRS Form 1099-DIV instructions.

How Can You Tell If You Have Qualified or Ordinary Dividends on Form 1099-DIV?

When you earn dividends from stocks, mutual funds, or ETFs, the financial institution will issue you Form 1099-DIV after the end of the tax year. Payers send the form for distributions of at least $10, according to IRS Topic 404. Check Form 1099-DIV to learn whether you earned qualified dividends, ordinary dividends, or both:

• Box 1a contains the total ordinary dividends you received.

• Box 1b contains the total qualified dividends you received.

Box 1b isn't extra income. It's the portion of box 1a that qualifies for lower rates, per IRS Publication 550. If you're new to these forms, here's how a 1099 form works.

For tax year 2026 (returns filed in 2027), qualified dividends are taxed at long-term capital gains rates of 0%, 15%, or 20%. Your rate depends on your filing status and your taxable income, not your total income, per IRS Revenue Procedure 2025-32.

What Are the Tax Year 2026 Rates for Qualified Dividends?

For tax year 2026, the 0% rate covers taxable income up to $49,450 for single filers, and the 20% rate starts above $545,500.

Source: IRS Rev. Proc. 2025-32. These rates match the ones for long-term gains, which our guide to capital gains tax rates explains in more detail.

Ordinary dividends, on the other hand, are taxed at your regular income tax rate:

What Are the Tax Year 2026 Rates for Ordinary Dividends?

For tax year 2026, ordinary dividends fall into the seven regular income tax brackets, which run from 10% to 37%. Rev. Proc. 2025-32 confirms those seven rates remain in effect after the One Big Beautiful Bill Act.

Source: IRS Rev. Proc. 2025-32. For a closer look at how each bracket works, see our guide to federal income tax brackets.

Do High Earners Pay an Extra Tax on Dividends?

Yes, high earners may owe the 3.8% net investment income tax (NIIT) on both qualified and ordinary dividends. It applies to the lesser of your net investment income or the amount your modified adjusted gross income (MAGI) exceeds your threshold.

For the NIIT, MAGI is your adjusted gross income plus certain excluded foreign income.

The IRS notes these thresholds aren't indexed for inflation. If you owe both the 20% qualified rate and the NIIT, your federal rate on those dividends reaches 23.8%.

Qualified dividends get lower rates if they pass the payer and holding-period tests, while ordinary dividends don't. Here's how they stack up:

Just as with investment income, it's important to understand how bonuses are taxed, as both can affect your total taxable income and final tax bracket.

"Typically, a taxpayer receives a Form 1099-DIV that identifies the qualified and ordinary dividends to be reported on the tax return. Dividend income is reported on line 3a and 3b of Form 1040. If your [ordinary] dividends on line 3b exceed $1,500, you must also fill out and attach Schedule B (Interest and Ordinary Dividends) to your Form 1040," explains Firth.

That $1,500 threshold matches IRS Topic 404; the line numbers are from the 2025 Form 1040. If you are unsure how to handle complex investment reporting, you may need to decide between hiring a Tax Attorney or a CPA to ensure your filings are accurate.

Use the income provided on Form 1099-DIV to supply this information; if you have multiple 1099-DIV Forms, make sure to add all your dividend income together before filling out your 1040.

To figure the tax, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, per IRS Publication 550.

There are several strategies you can use to take advantage of the qualified dividend tax rates and reduce your tax liability:

Why Should You Hold Dividend Stocks Through the Holding Period?

Holding shares through the dividend holding period lets the dividend qualify for lower capital gains rates. Keep in mind this dividend test is different from the more-than-one-year rule that makes a gain on a sale long term. To check your timing, use the holding period example above.

Can You Use the 0% Qualified Dividend Rate?

Yes, if your taxable income stays within the 0% band for tax year 2026. Per Rev. Proc. 2025-32, it tops out at $49,450 (single or married filing separately), $66,200 (head of household), or $98,900 (married filing jointly).

Lowering your taxable income, for example with pre-tax retirement contributions, can keep more of your qualified dividends in the 0% band. Our guide on how to reduce your taxable income covers more options.

Should You Hold Dividend Investments in Tax-Advantaged Accounts?

It can help, because dividends earned inside an IRA aren't taxed when they're paid. Under IRS Publication 590-B, traditional IRA withdrawals are taxed as ordinary income, while qualified Roth IRA withdrawals aren't taxed.

"Generally speaking, you want to hold investments that generate ordinary dividends in a tax-deferred account like a traditional IRA or 401(k) because you are matching the character of how it would be taxed upon distribution (i.e., it would be deemed ordinary income taxed at your highest marginal tax rate)," says Firth.

"Typically Roth accounts are where you'd hold growth-oriented investments. Investments that generate qualified dividends are good to hold in a taxable account or Roth account," Firth adds.

Are ETFs More Tax-Efficient Than Mutual Funds?

In a taxable account, ETFs typically are, since they tend to have fewer capital gains distributions than mutual funds, according to an SEC investor bulletin. Inside a tax-advantaged account, the SEC says there's no tax difference between the two.

Either way, dividends from an ETF are still taxed as qualified or ordinary under the same rules covered above.

Can Municipal Bonds Lower Taxes for High Earners?

They can, because interest on state and local government bonds generally isn't subject to federal income tax, per IRS Publication 550. Exceptions apply, such as some private activity bonds.

Exempt-interest dividends from municipal bond funds aren't included in taxable income, though you still report them. Tax-exempt interest is also excluded from the net investment income tax, per the IRS NIIT Q&A.

How dividends are taxed comes down to their type. Qualified dividends get 0%, 15%, or 20% rates based on taxable income, while ordinary dividends face regular brackets up to 37%.

The payer and your holding period decide which type you have. Check boxes 1a and 1b on your 1099-DIV, and watch for the 3.8% NIIT if your income is high.

This guide is for anyone who earns dividends in a taxable account and wants to know what they'll owe.

• New investors: If you just got your first 1099-DIV, start with the box 1a and 1b section.

• Active traders: If you buy and sell around dividend dates, start with the holding period example.

• Retirees and income investors: If your taxable income is near the 0% band, see the 0% rate section.

• High earners: If your MAGI tops $200,000 (single) or $250,000 (joint), read the NIIT section.

• REIT holders: If you own real estate investment trusts, review the ordinary dividends section.

Start with your own numbers, then plan ahead.

1. Pull your 1099-DIV and compare boxes 1a and 1b to see how much qualifies for lower rates.

2. Plan year-end moves, such as retirement contributions, with our guide to tax planning strategies.

3. Learn what happens if you don't pay your taxes if a dividend tax bill is more than you can afford.

4. Talk to a tax professional if your situation is complex, using the CPA vs. tax attorney guide linked above.

Are dividends taxed if I reinvest them?

Yes, you still owe taxes on reinvested dividend income in the year it's paid, according to IRS Publication 550. This is true whether you purchase shares yourself or automatically reinvest using a Dividend Reinvestment Plan (DRIP).

Is there a 0% tax rate on dividends?

Yes, qualified dividends are taxed at 0% for single filers with tax year 2026 taxable income of $49,450 or less, per Rev. Proc. 2025-32. If your total income is very low, also check how much you have to make to file taxes.

Why are REIT dividends usually taxed at a higher rate?

Per the IRS Form 1099-DIV instructions, REIT dividends are generally ordinary income, though qualified REIT dividends are eligible for the section 199A qualified business income deduction. That deduction has a 45-day holding rule, and a California FTB summary notes federal law made the 20% deduction permanent.

Do I pay state taxes on dividends?

It depends on where you live, because state treatment of dividends varies. Florida and Texas, for example, have no individual income tax, according to the Tax Foundation's 2026 State Tax Competitiveness Index. See our list of states with no income tax.

BestMoney reviewed the IRS, SEC, Tax Foundation, California FTB, and CBS News sources listed below. We checked every rate and threshold against the Rev. Proc. 2025-32 tables.

This article relies on these secondary sources plus expert commentary from CPA Ryan Firth, not on any proprietary BestMoney survey or data.

• IRS Rev. Proc. 2025-32 (Oct. 9, 2025)

• IRS News Release IR-2025-103 (Oct. 9, 2025)

• IRS Publication 550 (2025)

• IRS Instructions for Form 1099-DIV (rev. January 2024)

• IRS Topic No. 404, Dividends (reviewed Oct. 8, 2026)

• IRS Net Investment Income Tax Q&A (reviewed Sept. 14, 2026)

• IRS Publication 590-B (2025)

• SEC Investor Bulletin on Mutual Funds and ETFs (April 29, 2025)

• Tax Foundation 2026 State Tax Competitiveness Index (updated March 16, 2026)

• California FTB Summary of Federal Income Tax Changes (updated Oct. 6, 2026)

• CBS News on 2027 Tax Brackets (Sept. 11, 2026)