Understanding how dividends are taxed depends on whether they are classified as qualified or ordinary income.
May 17, 2026
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, typically owning the stock for more than 60 days. This guide breaks down the 2026 tax brackets and strategies to help you minimize your tax liability.
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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.
“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 president at Mercer Street, a financial and tax services firm.
Qualified dividends are paid on stock you hold for a specific period of time (the “holding period”) surrounding the ex-dividend date – the cutoff date by which you must own stock to receive the next dividend payout. 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.
Common stocks must be held for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date.
Preferred stocks must be held for at least 91 days during the 181-day window beginning 90 days before the ex-dividend date.
There are several reasons for the preferential tax treatment of qualified dividends. One reason is to encourage long-term investing which in theory reduces market volatility and supports corporate growth. Another reason is to mitigate the effects of double taxation, since the company pays tax at the corporate level and the shareholder pays tax at their personal rate.
Ordinary dividends are paid on stock that don’t meet the criteria for qualified dividends. They get taxed at the ordinary income rate for your tax bracket. If you hold onto ordinary dividends long enough, they can become qualified dividends.
Other types of ordinary dividends include:
Dividends paid on deposits at banks, credit unions, and other financial institutions
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
When you earn dividends from stocks, mutual funds, or ETFs, the financial institution will issue you Form 1099-DIV the following January. 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.
Qualified dividends are taxed at the long-term capital gains tax rate:
| Tax Rate | Single | Married Filing Separately | Married Filing Jointly | Head of Household |
|---|---|---|---|---|
| 0% | $0 to $49,950 | $0 to $49,450 | $0 to $98,900 | $0 to $66,200 |
| 15% | $49,451 to $545,500 | $49,451 to $306,850 | $98,901 to $613,700 | $66,201 to $579,600 |
| 20% | $545,501 and up | $306,851 and up | $613,701 and up | $579,601 and up |
| Tax Rate | Single Filers | Married Filing Separately | Married Filing Jointly | Head of Household |
|---|---|---|---|---|
| 10% | $0 to $12,400 | $0 to $12,400 | $0 to $24,800 | $0 to $17,700 |
| 12% | $12,401 to $50,400 | $12,401 to $50,400 | $24,801 to $100,800 | $17,701 to $67,450 |
| 22% | $50,401 to $105,700 | $50,401 to $105,700 | $100,801 to $211,400 | $67,451 to $105,700 |
| 24% | $105,701 to $201,775 | $105,701 to $201,775 | $211,401 to $403,550 | $105,701 to $201,775 |
| 32% | $201,776 to $256,225 | $201,776 to $256,225 | $403,551 to $512,450 | $201,776 to $256,200 |
| 35% | $256,226 to $640,000 | $256,226 to $384,350 | $512,451 to $768,700 | $256,201 to $640,600 |
| 37% | $640,601 and up | $384,351 and up | $768,701 and up | $640,601 and up |
“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. 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.
There are several strategies you can use to take advantage of the qualified dividend tax rates and reduce your tax liability:
Make sure to hold onto your dividend-producing stocks at least long enough to qualify for the long-term capital gains tax rate. How long depends on the type of stock, but generally you need to hold your shares for more than 60 days in the 121-day period starting 60 days before the ex-dividend date.
“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.
Exchange-traded funds (ETFs) offer more tax efficiency than mutual funds. Most ETFs are passively managed with less turnover than mutual funds, which results in fewer individual transactions. In addition, because ETFs are traded between investors in the market, they rarely trigger capital gains distributions.
Municipal bonds offer a tax-free alternative to dividends and can significantly reduce a tax bill for high earners. These bonds are tax-exempt, which means investors in higher tax brackets can use them to reduce their taxable income and avoid the taxes imposed on dividends.
Yes. You still owe taxes on dividend income that you reinvest. This is true whether you purchase shares yourself or automatically reinvest using a Dividend Reinvestment Plan (DRIP).
A common stock must be held for more than 60 days in the 121-day period starting 60 days before the ex-dividend date. For preferred stock, the holding period is more than 90 days in the 181-day period beginning 90 days before the ex-dividend date.
Most states tax dividends as ordinary income. However, some states (like Florida or Texas) do not have a state income tax, while others may have specific exemptions. Always check your local state tax laws.
Real estate investment trust (REIT) dividends are typically taxed at the ordinary income rate because REITs generally do not pay corporate income tax. However, they may be eligible for the 20% qualified business income (QBI) deduction.
Yes. Qualified dividends are subject to a 0% tax rate if your taxable income falls below specific thresholds (e.g., $49,950 for single filers in 2026). If you have a very low total income, you should also check how much you have to make to file taxes to see if you are required to submit a return at all.
Brian Acton is a seasoned personal finance journalist at BestMoney.com who specializes in loans and debt consolidation. His work has appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, HuffPost, and other notable outlets.
