Dividend Tax Guide
Dividends come in two tax categories: qualified dividends taxed at long-term capital gains rates (0%, 15%, or 20%) and ordinary dividends taxed as regular income (up to 37%). Understanding the difference is critical for income investors.
For 2025, qualified dividends receive preferential tax treatment with rates of 0% (taxable income up to $47,025 single / $94,050 married filing jointly), 15% (up to $518,900 single / $633,750 married filing jointly), and 20% (above those thresholds). To qualify, you must hold the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Ordinary dividends (also called non-qualified dividends) include dividends from REITs, money market funds, most foreign corporations, and shares held for less than the required period.
Consider an investor in the 24% income tax bracket who receives $10,000 in dividends. If the dividends are qualified, they pay 15% ($1,500). If ordinary, they pay 24% ($2,400). The difference of $900 per year on just $10,000 of dividends highlights the importance of holding periods. Most U.S. large-cap stocks (Apple, Microsoft, Johnson & Johnson) pay qualified dividends if held long enough.
Dividends paid by REITs, MLPs, and certain foreign companies are almost always ordinary dividends, taxed at your regular income rate. Dividend income from real estate investment trusts can be particularly tax-inefficient in taxable accounts. Similarly, dividends from money market funds and bond funds are taxed as ordinary income, which is why bonds and REITs are typically better placed in tax-advantaged accounts.
Dividend Tax in Retirement Accounts
In traditional IRAs and 401(k)s, dividends grow tax-deferred — you pay no tax on dividends each year, but withdrawals are taxed as ordinary income. In Roth IRAs, dividends grow tax-free and qualified withdrawals are entirely tax-free. This makes Roth accounts ideal for high-dividend strategies like REITs or high-yield dividend funds.
FAQs
How do I know if my dividends are qualified?
Your brokerage will report this on Form 1099-DIV: qualified dividends in Box 1b, ordinary dividends in Box 1a (which includes qualified dividends). Most major U.S. companies pay qualified dividends. The annual statement from your broker or fund company also shows the breakdown of qualified vs ordinary dividends and foreign tax paid.
Do foreign stocks pay qualified dividends?
Some do. Dividends from foreign corporations can be qualified if the corporation is incorporated in a U.S. possession, the stock is readily tradable on a U.S. stock exchange, or the foreign corporation has a tax treaty with the U.S. Most developed-market stocks (Toyota, Nestlé, Samsung ADRs) pay qualified dividends. Many emerging market stocks do not.
What happens if I hold a stock for less than the qualified period?
Dividends received during the short holding period are treated as ordinary dividends — taxed at your regular income rate up to 37%. If you buy a stock just to capture the dividend and sell immediately after, not only do you lose qualified status, but you may also have a short-term capital loss or gain. "Dividend capture" strategies are generally less attractive after accounting for ordinary income tax treatment.