may have access to dividends are taxed at the long-term capital gains rate, not your ordinary income tax rate

If you own stock or mutual funds that pay dividends, the tax you owe depends on whether those dividends are may have access to or ordinary. may have access to dividends are taxed using the same rate brackets as long-term capital gains — which are lower than the brackets used for wages, interest, or ordinary dividends. This is a real difference in dollars: a may have access to dividend might be taxed at 15% while your salary is taxed at 24%, even though both are income.

The reason Congress created this split is to encourage long-term investing. Ordinary dividends — paid by most bonds, money market funds, and some stocks held briefly — are taxed as regular income. may have access to dividends — paid by stocks you've held for more than 60 days around the payment date — get the capital gains treatment. The rate you actually pay depends on your total income for the year, not just the dividend itself.

Key Takeaways

  • may have access to dividends use the long-term capital gains tax brackets (0%, 15%, or 20%), which are lower than ordinary income brackets.
  • Your dividend is only may have access to if you held the stock for more than 60 days during a 121-day window centered on the ex-dividend date.
  • The tax rate you pay on may have access to dividends depends on your total taxable income for the year, not the dividend amount alone.
  • Mutual funds and ETFs can pay both may have access to and ordinary dividends in the same year, and your Form 1099-DIV will separate them.
  • Dividends from retirement accounts (401k, IRA) are not taxed at all until you withdraw money, regardless of whether they would be may have access to.

The three long-term capital gains tax brackets for may have access to dividends

The IRS uses three tax brackets for long-term capital gains and may have access to dividends. These brackets change each year based on inflation, and they are different from the ordinary income brackets. For 2024, the brackets are roughly 0%, 15%, and 20%, but the income thresholds that determine which bracket you fall into vary by filing status.

The 0% bracket applies to lower-income filers — for example, single filers with taxable income up to about $47,025 in 2024. If your may have access to dividends fall within this range, you owe no federal tax on them. The 15% bracket covers the middle range of income, and the 20% bracket applies to high earners. Because these brackets are wider than ordinary income brackets at the lower end, many people with moderate income pay 0% or 15% on dividends while paying 22% or 24% on their wages.

Your total taxable income determines which bracket applies, not just the dividend. If you earn $50,000 in salary and receive $5,000 in may have access to dividends, the first $47,025 of your total income (including the dividend) falls in the 0% bracket, and the remaining $7,975 falls in the 15% bracket. The dividend doesn't get its own separate calculation.

How the holding period requirement works

A dividend is only may have access to if you held the stock for more than 60 days during a specific 121-day window. The window begins 60 days before the ex-dividend date — the date by which you must own the stock to receive the dividend — and ends 60 days after it. This rule prevents people from buying a stock just before the dividend payment, collecting the dividend, and selling when ready while claiming the lower tax rate.

If you bought a stock on October 1 and it pays a dividend with an ex-dividend date of November 15, you must hold it until at least January 14 (more than 60 days after November 15) for the dividend to be may have access to. If you sell on January 10, the dividend is ordinary income, not may have access to. The 121-day window exists because the IRS counts both the day you buy and the day you sell, and the rule is designed to may support you hold through the dividend payment and beyond.

This rule applies separately to each dividend payment. If a company pays quarterly dividends, each payment has its own ex-dividend date and its own 121-day holding window. You could hold a stock long enough to may have access to for the first two dividends but sell before the third payment and fail to may have access to for it.

Mutual funds and ETFs report may have access to and ordinary dividends separately

When you own a mutual fund or exchange-traded fund (ETF), the fund itself holds many stocks. Some of those stocks may have paid may have access to dividends, and others may have paid ordinary dividends or interest. The fund passes through both types to you, and your Form 1099-DIV will show them separately in different boxes.

Box 1a on the 1099-DIV shows ordinary dividends. Box 1b shows may have access to dividends. You report each on your tax return in the appropriate place — may have access to dividends go on Schedule D or Form 8949, while ordinary dividends go on Schedule B. The fund's holding period for each underlying stock determines whether the dividend it received was may have access to; your holding period of the fund itself does not matter for this purpose.

Some funds, particularly bond funds or money market funds, may report only ordinary dividends because they hold bonds or very short-term securities. Other funds, particularly stock funds, may report mostly may have access to dividends. A fund's prospectus or annual report will tell you what types of securities it holds, which gives you a sense of what kind of dividends to expect.

Dividends in retirement accounts are not taxed until withdrawal

If you own stocks or funds inside a traditional IRA, 401(k), or other may have access to retirement account, the dividends paid by those investments are not taxed in the year they are paid. The money stays inside the account and grows tax-free. When you eventually withdraw money from the account — typically after age 59½ — the entire withdrawal is taxed as ordinary income, regardless of whether the dividends inside were may have access to or ordinary.

This is one reason retirement accounts are powerful: you can reinvest dividends without paying tax on them each year, and the compounding effect over decades is substantial. The tradeoff is that all withdrawals are taxed as ordinary income, not at capital gains rates. Roth IRAs are different — may have access to withdrawals are not taxed at all, even though the dividends inside also grew tax-free.

How to report may have access to dividends on your tax return

may have access to dividends are reported on Form 1040, Schedule B (if you have more than $1,500 in dividend income) or directly on Form 1040 if you have less. The IRS provides a worksheet to calculate how much of your dividend income is may have access to and how much is ordinary. Your brokerage or mutual fund company will send you a Form 1099-DIV that separates the two, so you do not have to calculate it yourself.

If you use tax software, you enter the may have access to and ordinary dividend amounts from your 1099-DIV, and the software automatically applies the correct tax rates. If you file by hand, you use the may have access to dividends worksheet in the Form 1040 instructions to determine how much of your income falls into each capital gains bracket. The worksheet accounts for your filing status and other income to determine the exact amount taxed at 0%, 15%, or 20%.

If you have a large amount of investment income, you may also owe the Net Investment Income Tax (NIIT), which is an additional 3.8% tax on certain investment income above a threshold. may have access to dividends are subject to NIIT if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).

State and local taxes on may have access to dividends vary widely

Federal tax is only part of the story. Most states tax may have access to dividends, and many tax them at the same rate as ordinary income, not at capital gains rates. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax dividends at all. Others, like California, tax all dividends as ordinary income regardless of whether they are may have access to federally.

Your state tax bill on a may have access to dividend depends on where you live and where you earned the income. If you live in New York and receive a dividend from a New York company, you pay New York state tax. If you move during the year, you may owe tax to two states. Some states offer credits for taxes paid to other states, but the rules are complex. Your state tax return will ask for dividend income, and you should check your state's instructions to see whether it distinguishes between may have access to and ordinary dividends.

Frequently Asked Questions

Can I lose the may have access to dividend rate if I sell the stock too soon?

Yes. If you sell within 60 days after the ex-dividend date, the dividend becomes ordinary income even if you held the stock for years before that. The 60-day holding period is measured from the ex-dividend date, not from when you bought the stock. Plan your sales around dividend dates if you want to preserve the may have access to rate.

What if my brokerage reports a dividend as ordinary but I think it should be may have access to?

Contact your brokerage and ask them to verify the holding period. They have access to your exact purchase and sale dates and can confirm whether you met the 60-day requirement. If they made an error, they will issue a corrected 1099-DIV. Do not file your return until you have the correct form.

Do I pay tax on may have access to dividends if I have no other income?

You may owe no federal tax if your may have access to dividends are your only income and they fall below the standard deduction for your filing status. However, you still must file a return to report the income. Some states require a return even if you owe no federal tax.

Are dividends from a DRIP plan (dividend reinvestment) treated differently?

No. A DRIP automatically reinvests your dividends to buy more shares, but the dividends are still taxable in the year they are paid. You report them the same way as dividends you received in cash. The holding period for the new shares purchased through the DRIP begins on the reinvestment date, not when you originally bought the stock.

What happens to may have access to dividends if I inherit stock?

Inherited stock receives a "stepped-up basis" — its value is reset to the market price on the date of death. Any dividends paid after you inherit are treated as may have access to if you hold the stock for more than 60 days after the ex-dividend date, measured from your inheritance date, not the original owner's purchase date.