Dividends are payments that investors can receive from stocks, exchange-traded funds (ETFs), and mutual funds. These earnings count as income and may be taxable, depending on your income and filing status.
We’ll investigate dividend tax rates and the difference between ordinary and qualified dividends.
Table of Contents
Key Points
• Qualified dividends are subject to lower tax rates than ordinary dividends.
• To qualify for the lower tax rate, dividends must meet specific criteria set by the IRS.
• The tax rates for qualified dividends range from 0% to 20% based on your income level.
• Holding period requirements must be met for dividends to be considered qualified.
• Understanding the tax implications of qualified dividends can help with tax planning and maximizing investment returns.
Defining Ordinary and Qualified Dividends
The IRS divides stock dividends into two categories: ordinary and qualified. The federal tax rate is different for each category. A qualified dividend is one that qualifies for a lower tax rate based on the concept of capital gains. An ordinary dividend, meanwhile, is one that doesn’t that doesn’t qualify for a lower rate.
When a company declares a dividend payment, your dividend is ordinary if you’ve held their stock for less than 61 days over a 121-day period. If, however, you make the stock purchase on or before the date that it’s declared, and then hold it for at least 61 days, it is considered qualified.
The timing also matters. Let’s say that you own stock in Company A, and they announce that a dividend will be paid on December 1. The day before, November 30, is called the ex-dividend date, or ex-date. If you bought your shares of stock 60 days or fewer before November 30, then your dividend is ordinary. But if you bought the stock more than 60 days before November 30, your dividend is qualified.
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Qualified Dividend Documentation
When it’s tax time, you’ll receive a 1099-DIV. This is the form that financial institutions use to report dividends to the IRS and relevant taxpayers. Box 1a shows the total ordinary dividends you received during this tax period. Box 1b shows your qualified dividends. The form will also show any federal or state income tax that was withheld. You can use this information plus the federal dividend tax rate to determine what you owe.
Financial institutions must issue a 1099-DIV to shareholders who receive more than $10 in dividends and other distributions for the year. For more on tax documentation, read our story on the most common types of tax forms.
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Tax Information for Ordinary and Qualified Dividends
The ordinary dividend tax rate is the same as an individual’s income tax bracket for the year.
The qualified dividend tax rate for 2023 is calculated using capital gains tax rates. This may be 0% depending on your taxable income and filing status. Here are the latest figures from the IRS:
• Less than $44,625 for single or married filing separately.
• Less than $59,750 for head of household.
• Less than $89,250 for married filing jointly or qualifying widow(er).
The qualified dividend tax rate rises to 15% for the next tax brackets:
• $44,625 to $492,300 for single filers.
• $44,625 to $276,900 for married filing separately.
• $59,750 to $523,050 for head of household.
• $89,250 to $553,850 for married filing jointly or qualifying widow(er).
Once your household income exceeds the 15% bracket, you’ll pay a 20% tax rate on any qualified dividends. There may also be a 3.8% net investment income tax. Consult your accountant or financial advisor regarding your situation.
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Dividend Tax Rate 2022
The thresholds can change by year. For example, the dividend tax rate for 2022 was as follows:
• 0% dividend tax rate:
◦ Single filers, up to $41,675
◦ Married filing jointly, up to $83,350
• 15% dividend tax rate:
◦ Single filers, $41,676–$459,750
◦ Married filing jointly, $83,351–$517,200
• 20% dividend tax rate:
◦ Single filers, $445,851+
◦ Married filing jointly, $517,201+
Dividend Tax Rate 2024
Looking ahead, we’ve got some insights into the 2024 tax year. A married couple filing jointly won’t pay taxes on qualified dividends until their income is above $94,054. Above that amount, the tax rate will be 15%. The tax raise will go up to 20 percent when a couple earns more than $583,751.
Individual filers won’t pay 15% until their income is greater than $47,025. They’ll pay 20% when income exceeds $518,901.
Recommended: Guide to Filing Your Taxes for the First Time
Why Are the Two Types of Dividends Taxed Differently?
Qualified dividends are more favorably taxed as an incentive to investors to hold onto stocks for a longer period of time. This is based on the concept of capital gains.
Additional Qualified Dividend Requirements
Besides the holding period described above, the dividend must have been paid by a corporation in the U.S. or a qualifying foreign one. Plus, the payment can’t be a dividend in name only. For example, payments given by tax-exempt agencies don’t qualify.
If a payment doesn’t satisfy all three requirements, then it can’t be a qualified dividend. It may be an ordinary dividend or another type of income.
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The Takeaway
There are two broad types of dividends: ordinary and qualified. Qualified dividends are taxed at a lower rate than ordinary dividends. For a dividend to be qualified, an investor must hold the stock for at least 61 days during a particular time frame. A 1099-DIV will break out dividends into qualified and ordinary for the taxpayer’s information. There are three tax rates for qualified dividends. The lowest tax brackets pay nothing. The next brackets pay 15%, and the highest brackets pay 20%. Ordinary dividends are taxed as regular income.
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FAQ
What is the tax rate on dividends in 2024?
The ordinary dividend tax rate is based on your tax bracket. With a qualified dividend tax rate, it depends on your filing status and your income. The lowest tax brackets pay nothing, the middle brackets pay 15%, and the highest brackets pay 20%.
How do I calculate my qualified dividends?
Investors receive form 1099-DIV from their financial institution, which provides the amount of ordinary and qualified dividend income received during the year. The IRS also provides a worksheet.
Why are my qualified dividends being taxed?
Dividends are a type of income, and investors who receive them typically pay taxes on them. It’s true that individuals who make less than $47,025 in 2024 pay no tax on qualified dividends. However, taxpayers in higher brackets must pay 15% or 20%.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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