Dividends are payments some companies make to shareholders, which can provide a passive source of income. When you hold dividend-paying investments in a taxable investment account, you'll need to pay taxes on the dividends. How much you owe depends on whether these are qualified dividends. Read on to understand what qualified dividends are, how they work, and how they're taxed.
What are qualified dividends?
Qualified dividends are payments from companies to shareholders that are typically taxed less than ordinary income. To be considered qualified dividends:
- The dividends typically must be paid by a US corporation or qualifying foreign company.
- The investor must have owned the dividend-producing investment for a holding period of more than 60 days during a 121-day period, starting 60 days before the day the stock/ETF trades without the dividend, aka the "ex-dividend date." If you bought the share(s) that day, you are not entitled to the dividend; if you bought the share(s) before the ex-dividend date, you would be entitled to the dividend.
- For certain preferred shares, the holding period is at least 91 days within a 181-day period, starting 90 days before the ex-dividend date.
- For mutual funds, the investor must have held applicable shares for at least 61 days within a 121-day period, starting 60 days before the fund's ex-dividend date.
- The shares must be unhedged, meaning there were no puts, calls, or short sales associated with the shares during the holding period.
Getting dividends from real estate investment trusts (REITs)? They don't typically count as qualified dividends.
How do qualified dividends work?
Qualified dividends are considered income. If you're issued qualified dividends through a tax-advantaged account like a 401(k), IRA, health savings account (HSA), or 529 savings plan, you wouldn't have to pay income taxes on the dividends when they're issued. If, on the other hand, the dividends come to a taxable account, you'd be taxed on them as part of your income for the year they were distributed. While ordinary dividends are taxed at an investor's ordinary income tax rate, which tops out at 37%, qualified dividends are taxed at the more favorable capital gains tax rate.
Example of qualified dividends
Let's say you have qualified dividends from shares in XYZ fund.
- You purchased 5,000 shares of XYZ fund on April 27 of this tax year. You then sold 1,000 shares on June 15 but continue to hold the remaining 4,000 shares (unhedged at all times).
- The ex-dividend date for XYZ fund was May 2. So during the 121-day window, you held 1,000 shares for less than 60 days (from April 28 through June 15) and continued to hold 4,000 shares for at least 61 days.
The dividend income from the 1,000 shares you held for less than 60 days would not be qualified, and you'd be taxed on those dividends at your ordinary income tax rate. The dividend income from the 4,000 shares you held for at least 61 days likely would count as qualified, and you'd pay a lower tax rate on those dividends.
Qualified dividend tax rates
Qualified dividends are taxed at the same rates as long-term capital gains: 0%, 15%, or 20% at the federal level. How much you pay depends on your income and tax-filing status.
You might also be subject to the net investment income tax (NIIT) of 3.8% on top of dividend taxes. This applies to single filers with a modified adjusted gross income (MAGI) above $200,000 ($250,000 for married couples filing jointly). That could push your capital gains tax rate even higher, so be prepared.
Note that even if you reinvest your dividends, which you might do through a dividend reinvestment plan (DRIP), they're still taxable. Reinvesting dividends allows you to purchase additional shares (or fractional shares if the dividends can't cover the cost of a full share) of company stock or a fund.
Qualified dividends might instead be received directly in stock, in which case they are not taxed until you sell the stock.
2025 qualified dividend tax brackets
| Qualified dividend tax rate | Single (taxable income) | Married filing separately (taxable income) | Head of household (taxable income) | Married filing jointly (taxable income) |
|---|---|---|---|---|
| 0% | Up to $48,350 | Up to $48,350 | Up to $64,750 | Up to $96,700 |
| 15% | Over $48,350 to $533,400 | Over $48,350 to $300,000 | Over $64,750 to $566,700 | Over $96,700 to $600,050 |
| 20% | Over $533,400 | Over $300,000 | Over $566,700 | Over $600,050 |
Source: IRS
2026 qualified dividend tax brackets
| Qualified dividend tax rate | Single (taxable income) | Married filing separately (taxable income) | Head of household (taxable income) | Married filing jointly (taxable income) |
|---|---|---|---|---|
| 0% | Up to $49,450 | Up to $49,450 | Up to $66,200 | Up to $98,900 |
| 15% | Over $49,450 to $545,500 | Over $49,450 to $306,850 | Over $66,200 to $579,600 | Over $98,900 to $613,700 |
| 20% | Over $545,500 | Over $306,850 | Over $579,600 | Over $613,700 |
Source: IRS
Qualified dividends vs. ordinary dividends
Ordinary dividends are those that don't meet the IRS criteria for qualified dividends and are taxed at ordinary income tax rates instead of long-term capital gains rates. Ordinary dividends are also called nonqualified dividends. Knowing the difference between nonqualified dividends and qualified dividends can help you better estimate your tax liability.
Are your dividends qualified or ordinary?
Your dividends are considered qualified if they meet the IRS criteria. An easier way to tell: Qualified dividends are listed in box 1b on Form 1099-DIV, while ordinary dividends are listed in box 1a. If you earned more than $10 in dividend income in a taxable brokerage account, your brokerage firm or financial institution should send you that form, which you'll need to file your tax return.
Consult a tax professional or tax software on how to report qualified dividends when filing your tax return.
How to minimize the impact of dividends on your taxes
You might be able to reduce the tax impact of dividends by:
- Holding dividend-producing shares long enough to qualify for those lower, qualified tax rates
- Holding shares in tax-advantaged accounts like a 401(k), IRA, or HSA so you don't have to pay taxes on dividend income in the year they are paid out
- Considering tax-loss harvesting, a strategy that uses capital losses to offset capital gains