Dividend income is taxed at two different rates depending on how long you held the stock

Not all dividend income is taxed the same way. The IRS splits dividends into two categories: may have access to dividends, which get preferential tax rates, and ordinary dividends, which are taxed as regular income at your marginal rate. Which category your dividends fall into depends on how long you owned the stock before the dividend was paid, not on the company or the dividend amount.

If you held the stock for more than 60 days during the 121-day window around the ex-dividend date, your dividend is may have access to. If you held it for 60 days or fewer, or if the dividend comes from certain types of investments (money market funds, REITs, preferred stock in some cases), it counts as ordinary income. This distinction can mean a tax difference of 15 to 20 percentage points on the same dollar amount.

Key Takeaways

  • may have access to dividends are taxed at 0%, 15%, or 20% depending on your tax bracket, while ordinary dividends use your full marginal tax rate (10% to 37%).
  • You must hold the stock for more than 60 days in the 121-day period centered on the ex-dividend date to may have access to for the lower rate.
  • Dividends from REITs, master limited partnerships, and money market funds are almost always taxed as ordinary income regardless of holding period.
  • Your brokerage reports which dividends are may have access to and which are ordinary on Form 1099-DIV, so you do not have to calculate it yourself.
  • Bunching charitable donations or managing your income in high-earning years can affect which tax bracket applies to your dividend income.

may have access to dividends and the 60-day holding rule

To receive the preferential may have access to dividend rate, you must satisfy a holding period test. You need to own the stock for more than 60 days during a 121-day window that starts 60 days before the ex-dividend date and ends 60 days after it. The ex-dividend date is the cutoff: if you buy the stock on or after that date, you do not receive the dividend at all.

This rule exists to prevent investors from buying a stock just before a dividend payment and selling when ready after, pocketing the dividend while claiming long-term investment status. If you hold the stock for 60 days or fewer in that window, the dividend reverts to ordinary income treatment, even if you have owned the stock for years overall.

The 121-day window is centered on the ex-dividend date, not the payment date. The payment date is when you actually receive the money; the ex-dividend date is typically one business day before the record date. Your brokerage statement will show both dates, but only the ex-dividend date matters for the holding period calculation.

Ordinary dividends and which investments generate them

Certain investments produce dividends that are always taxed as ordinary income, no matter how long you hold them. Real Estate Investment Trusts (REITs) are the most common example. By law, REITs must distribute at least 90% of taxable income to shareholders, and those distributions are taxed as ordinary income. The same applies to dividends from Master Limited Partnerships (MLPs), which are typically energy infrastructure investments.

Money market funds and some preferred stock also generate ordinary dividends. Preferred stock is trickier: dividends on most preferred shares are may have access to, but dividends on certain preferred shares issued before 2003, or on preferred shares of financial institutions, may be ordinary. Your 1099-DIV will specify which category each dividend falls into.

If you own mutual funds or exchange-traded funds (ETFs), the fund itself receives dividends from its holdings, and the fund then distributes them to you. The character of the dividend — may have access to or ordinary — passes through to you based on the underlying stocks the fund holds and how long the fund held them. A fund's prospectus or annual report will disclose what portion of its distributions are typically may have access to.

Tax brackets and the rate you actually pay on may have access to dividends

may have access to dividends are taxed at 0%, 15%, or 20%, depending on your tax bracket for the year. The 0% rate applies to income that falls within the standard deduction or the lowest tax bracket. The 15% rate applies to most middle-income filers. The 20% rate applies to income above the top of the 15% bracket, which in 2024 begins at $492,300 for single filers and $553,850 for married filing jointly (these thresholds adjust annually for inflation).

Your tax bracket is determined by your total taxable income for the year, including wages, capital gains, and both may have access to and ordinary dividends. If you have a high-income year, some of your may have access to dividends may be taxed at 20% instead of 15%. This is where income timing decisions matter: if you can defer income to the next year or accelerate deductions into the current year, you might keep more of your dividend income in the 15% bracket instead of pushing it into the 20% bracket.

Ordinary dividends, by contrast, are taxed at your marginal rate — the same rate as your wages. For a high earner in the 37% bracket, ordinary dividends are taxed at 37%, while may have access to dividends on the same investment would be taxed at 20%. That 17-percentage-point difference is substantial on large dividend payments.

How to report dividends on your tax return

Your brokerage sends you a Form 1099-DIV by January 31 each year. This form separates may have access to dividends (Box 1b) from ordinary dividends (Box 1a). You do not have to calculate which dividends may have access to; the brokerage does that work based on the holding period and the type of investment.

On your tax return, may have access to dividends go on Schedule B (if you have more than $1,500 in interest or dividends) and then to Form 1040, line 5b. Ordinary dividends go to line 5a. Tax software will prompt you to enter these amounts and will explore the correct tax rate automatically. If you use a tax professional, provide them with your 1099-DIV and let them handle the placement.

If your brokerage incorrectly categorizes a dividend, you can correct it on your return. This is rare but can happen with certain preferred shares or if you sold the stock before meeting the holding period and the brokerage did not catch it. Keep records of your purchase and sale dates for each holding to verify the brokerage's work.

Strategies to manage dividend taxation

If you receive substantial dividend income, you have several levers to pull. First, hold dividend-paying stocks for the full 60-day window to capture the may have access to rate. If you are planning to sell a stock soon after a dividend payment, calculate whether the tax savings from the may have access to rate justify holding it longer.

Second, bunch deductions into high-income years to lower your taxable income and potentially keep more dividends in the 15% bracket instead of the 20% bracket. If you have discretionary charitable donations or can accelerate business expenses, doing so in a year when you receive a large dividend payment or bonus can reduce the bracket creep on your dividend income.

Third, consider the tax character of the investments you hold. If you hold REITs or MLPs in a taxable account, you are paying ordinary income tax on their distributions. Holding these in a tax-deferred account like a 401(k) or IRA shields that ordinary-income dividend from current taxation. Conversely, may have access to dividend stocks are often better held in taxable accounts where you benefit from the preferential rate.

Fourth, use tax-loss harvesting to offset dividend income. If you have losses in other positions, you can realize them to offset the taxable gain from your dividends. This is most useful in years when you have received a large one-time dividend or when you have concentrated positions with embedded losses.

What happens if you do not meet the holding period

If you buy a stock, collect the dividend, and sell within 60 days, the dividend becomes ordinary income. This can happen unintentionally if you are rebalancing a portfolio or if you bought a stock for reasons other than the dividend and happened to receive one. The tax impact is automatic — you do not have a choice to treat it as may have access to.

Some investors use a strategy called dividend capture, where they buy a stock just before the ex-dividend date, collect the dividend, and sell shortly after. The goal is to pocket the dividend while the stock price falls by roughly the dividend amount. However, the tax cost of ordinary income treatment, plus trading costs and bid-ask spreads, usually makes this strategy unprofitable for most individual investors.

If you are holding a stock primarily for the dividend and you know you will sell it soon, calculate the after-tax cost of ordinary income treatment. If the dividend is small relative to the stock price, it may not be worth holding to meet the 60-day threshold. If the dividend is large, the tax savings from may have access to it often justify the holding period.

Frequently Asked Questions

Can I choose to treat may have access to dividends as ordinary income to offset losses?

No. The IRS determines the character of the dividend based on the holding period and the type of investment. You cannot elect to treat a may have access to dividend as ordinary income. However, you can use capital losses to offset dividend income, which reduces your overall taxable income and may lower your tax bracket.

What if I inherit a stock and receive a dividend shortly after?

Inherited stock gets a "stepped-up basis" to its value on the date of death, but the holding period for the may have access to dividend test resets. You must hold the inherited stock for more than 60 days after you receive it to treat the next dividend as may have access to. The holding period does not carry over from the deceased person's ownership.

Do I have to pay estimated taxes on dividend income?

If your dividend income is not withheld from a paycheck and your total tax liability for the year will be more than your withholding plus credits, you may owe estimated taxes. Estimated taxes are due quarterly. Your tax professional can calculate whether you need to make quarterly payments based on your expected dividend income and other income for the year.

Are dividends from foreign stocks taxed differently?

Dividends from foreign corporations are generally treated the same way as U.S. dividends for purposes of the may have access to dividend rate, provided you meet the holding period. However, you may also owe foreign tax on the dividend, and you can claim a foreign tax credit on your U.S. return. The rules are complex, and a tax professional should review foreign dividend income.

If I own a stock through a 401(k), are the dividends taxed?

No. Dividends received inside a 401(k), IRA, or other tax-deferred account are not taxed in the year they are received. They grow tax-free until you withdraw money from the account. When you withdraw, the entire withdrawal is taxed as ordinary income (or as a may have access to distribution in the case of a Roth IRA). This is one reason tax-deferred accounts are useful for holding dividend-paying stocks.