Dividend Explanation

Dividend Taxes

Understanding how your investment earnings are taxed is a crucial part of any successful income strategy. While generating a steady stream of passive income is the goal, overlooking the impact of dividend taxes can significantly reduce your net returns. The good news is that not all dividends are taxed equally. The U.S. tax code offers preferential rates for “qualified” dividends, rewarding long-term investors. Here we break down everything you need to know, including qualified vs. ordinary dividends, the tax forms you’ll receive, and tax-advantaged accounts.

To see how taxes fit into the bigger picture, explore our Ultimate Guide to Dividend Investing.

Holding Periods and Types of Payments

Qualified vs. Ordinary Dividends

Understanding the difference between qualified and ordinary dividends is crucial for tax purposes. Qualified dividends are taxed at lower capital gains rates, while ordinary dividends are taxed at your higher, regular income rate.

Qualified Dividend

A dividend that meets specific IRS requirements, allowing it to be taxed at the lower long-term capital gains rates instead of the higher rates for ordinary income. This tax-favored treatment is a significant benefit for long-term investors.

  1. Source: The dividend must be paid by a U.S. corporation or a qualified foreign corporation. Most regular dividends from major companies traded on U.S. exchanges meet this rule.
  2. Holding Period: You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This rule prevents traders from buying a stock just to capture the dividend and immediately selling it.

Qualified dividends are taxed at the same preferential rates as long-term capital gains. For the 2025 tax year, these rates are 0%, 15%, or 20%, depending on your total taxable income.

Ordinary Dividend

These dividends don’t qualify for any special tax rates.  Ordinary dividends are taxed at your regular ordinary income tax rate.  They typically fall into one of 3 categories:

  • Short-term holding period
  • Non-stock payment, like a Real Estate Investment Trust (REIT) or a Master Limited Partnership (MLP)
  • Payment is technically a distribution of interest from a money market fund, fixed income security, or bond fund

Form 1099-DIV

This is the specific IRS form that investors receive from their brokerage detailing all dividend and distribution income for the year. It’s the primary document used for tax preparation, making it a highly relevant and practical document.

Most major brokers provide the 1099-DIV for the previous year by mid-February.  It is normally included as a section of their Consolidated Form 1099.  This single document often includes all the relevant tax information for your account, including our 1099-DIV (for dividends), 1099-B (for trades), and 1099-INT (for interest).  

Tax-Advantaged Accounts

When it comes to taxes, the type of account you are using will make a big difference. If you are investing in a tax-qualified account, like a Roth or Traditional IRA, you will not pay tax on capital gains, dividends, or any other income.  We often refer to these types of accounts as retirement accounts.  Company-sponsored retirement accounts, like a 401(k) or 403(b), also defer annual tax payments on dividends.

Tax Time Implications

Keeping More of Your Dividends

Understanding dividend taxes is crucial for managing your overall investment income tax. The rate you pay depends on whether your dividends are “qualified”—taxed at lower capital gains rates (0-20%)—or “ordinary,” which are taxed at higher income rates. This distinction is based on the source and your holding period. Your broker reports this income to you on Form 1099-DIV, which you should receive by mid-February each year.