The tax treatment of dividends in the U.S. depends on whether the Internal Revenue Code (IRC) classifies them as qualified dividends or ordinary dividends (also referred to as nonqualified dividends.) Qualified dividends are taxed at the same rates as the capital gains tax rate. These rates are lower than ordinary income tax rates.
The tax rates forordinary dividends(typically those that are paid out from most common or preferred stocks) are the same as standard federal income tax rates or 10% to 37% for the 2023 and 2024 tax years. Investors pay taxes on ordinary dividends at the same rates they pay on their regular income, such as salary or wages. Income-tax and capital gains rates change over time, but in recent years, the latter has been substantially lower than the former.
Key Takeaways
- A dividend is part of a company's earnings that is paid directly to shareholders.
- Anyone who receives dividends must pay taxes on them.
- The tax treatment of dividends in the U.S. depends on whether the Internal Revenue Code classifies them as qualified or ordinary dividends.
- Qualified dividends are taxed at the same rates as the capital gains tax rate, which is lower than ordinary income tax rates.
- The tax rates forordinary dividendsare the same as standard federal income tax rates; 10% to 37%.
Qualified Dividends vs. Ordinary Dividends
A dividend is a portion of a company's earnings paid directly to shareholders. Companies that offer dividends pay a fixed amount per share and can adjust it up or down with each earnings period (usually a calendar quarter) based on how the company is doing. The investor must pay taxes on their dividends, but how much they pay depends on whether the dividends are qualified or ordinary.
Qualified dividends, which receive more favorable tax treatment, must meet a few criteria. They must be issued by U.S. corporations publicly traded on major exchanges, such as the Dow Jones or Nasdaq. The investor must own them for at least 60 days out of a 121-day holding period. Certain dividends, such as those derived from an employee stock ownership plan or issued by a tax-exempt organization, are not eligible for qualified status.
There is no significant difference between qualified and ordinary dividends apart from their tax treatment.
Qualified-Dividend Tax Treatment
Investors favor qualified dividends because they are subject to lower tax rates, namely those levied on long-term capital gains rather than those charged on ordinary income. That's true regardless of the investor's tax bracket, though the biggest savings accrue to investors in the top two brackets, where the tax rate difference between the two types of dividends can be as much as 20%.
The tax schedule for qualified dividends features only three levels: 0%, 15%, and 20%.
The tax brackets are as follows:
| Dividend Tax Rates for Tax Year 2023 | ||||
|---|---|---|---|---|
| Tax Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 0% | $0 - $44,625 | $0 to $89,250 | $0 to $44,625 | $0 to $59,750 |
| 15% | $44,626 - $492,300 | $89,251 to $553,850 | $44,626 to $276,900 | $59,751 to $523,050 |
| 20% | $492,301 or more | $553,851 or more | $276,901 or more | $523,051 or more |
Source: Internal Revenue Service
| Dividend Tax Rates for Tax Year 2024 | ||||
|---|---|---|---|---|
| Tax Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 0% | $0 - $47,025 | $0 to $94,054 | $0 to $47,025 | $0 to $63,000 |
| 15% | $47,026 - $518,900 | $94,055 to $583,750 | $47,026 to $291,850 | $63,001 to $551,350 |
| 20% | $518,901 or more | $583,751 or more | $291,851 or more | $551,351 or more |
Source: Internal Revenue Service
Individuals who earn $200,000 or more, and married couples who earn $250,000 more, pay an additional 3.8% on investment income, including qualified dividends.
Example of How Dividends Are Taxed
To see the difference these two tax treatments make, imagine an investor with 5,000 shares of Company X that generate $2 each in ordinary dividends, or $10,000 a year. Assume they are single and have a taxable income of $50,000 a year, which places them in the 22% marginal income rate bracket for ordinary income.
Since ordinary dividends receive no special tax treatment, they pay 22%, or $2,200, in taxes on their dividends. However, if their dividend is qualified, they pay a 15% rate, based on their income, or $1,500.
Imagine the same investor, still single, earns a taxable income of $1 million per year, excluding dividends from 50,000 shares of Company X stock. At $2 per share, their yearly dividend is $100,000. Taxed at the 37% top marginal rate, they owe $37,000 in federal taxes on the dividends if they're ordinary, but only $20,000 if they are qualified, a $17,000 savings.
At What Rates Are Dividends Taxed?
If your dividends are qualified dividends they will be taxed at the capital gains tax rate of either 0%, 15%, or 20%, depending on your income tax bracket. If your dividends are ordinary dividends (nonqualified), they will be taxed at your regular marginal income tax rate.
Are Dividends Taxed Twice?
Yes, dividends are taxed twice. This concept is known as double taxation. The first round of taxes occurs on the earnings of a company. Dividends come from a company's earnings and then are distributed to shareholders. Shareholders then have to pay tax on the dividends they receive.
How Do I Minimize the Taxes I Pay on Dividends?
One way to minimize taxes paid on dividends is to try to have qualified dividends, those that incur a lower tax rate than nonqualified dividends. Another method is opening a tax-advantaged brokerage account, such as an IRA, where you can defer taxes paid until you are in a lower income tax bracket when you withdraw from the account.
The Bottom Line
Dividends can be a great way to earn an income stream from your investments, but, like all income, they are also taxed. Depending on the type of dividend, qualified or nonqualified, you will be taxed at either your ordinary income tax bracket or the capital gains tax bracket, which is usually a lower tax rate.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Internal Revenue Service. "Publication 550, Investment Income and Expenses (Including Capital Gains and Losses," Page 19.
Internal Revenue Service. "Topic No. 404, Dividends."
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2024."
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2023."
Internal Revenue Service. "Dividends and Distributions," Page 5.
Internal Revenue Service. "Rev. Proc. 2022-38," Pages 8-9.
Internal Revenue Service. "Rev. Proc. 2023-34," Pages 7-8.
Internal Revenue Service. "Questions and Answers on the Net Investment Income Tax."
Compare Accounts
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Insights, advice, suggestions, feedback and comments from experts
I am an expert and enthusiast. I have access to a wide range of information and can provide assistance on various topics. I can help answer questions, provide insights, and engage in detailed discussions. Let's dive into the concepts discussed in this article.
Tax Treatment of Dividends in the U.S.
The tax treatment of dividends in the U.S. depends on whether they are classified as qualified dividends or ordinary dividends. Qualified dividends are taxed at the same rates as the capital gains tax rate, which is generally lower than ordinary income tax rates. On the other hand, ordinary dividends are taxed at the standard federal income tax rates, which range from 10% to 37% for the 2023 and 2024 tax years.
Qualified Dividends vs. Ordinary Dividends
A dividend is a portion of a company's earnings that is paid directly to shareholders. Qualified dividends must meet certain criteria to receive more favorable tax treatment. They must be issued by U.S. corporations publicly traded on major exchanges, such as the Dow Jones or Nasdaq. The investor must also meet certain ownership requirements, such as owning the shares for a specific period of time. Certain dividends, such as those derived from an employee stock ownership plan or issued by a tax-exempt organization, are not eligible for qualified status.
Tax Rates for Qualified Dividends
Qualified dividends are subject to three tax rates: 0%, 15%, and 20%. The specific tax rate depends on the individual's income tax bracket. For the tax year 2023, the tax brackets for qualified dividends range from 0% to 20% based on income. Similarly, for the tax year 2024, the tax brackets for qualified dividends range from 0% to 20% based on income.
Tax Rates for Ordinary Dividends
Ordinary dividends, which do not meet the criteria for qualified status, are taxed at the standard federal income tax rates. These rates range from 10% to 37% for the 2023 and 2024 tax years.
Additional Taxes on Investment Income
Individuals who earn $200,000 or more, and married couples who earn $250,000 or more, may be subject to an additional 3.8% tax on investment income, including qualified dividends.
Example of Taxation on Dividends
To illustrate the difference in tax treatment, let's consider an example. Suppose an investor owns 5,000 shares of Company X, which generates $2 per share in ordinary dividends, resulting in $10,000 in annual dividends. If the investor has a taxable income of $50,000 and falls into the 22% marginal income tax bracket for ordinary income, they would pay $2,200 in taxes on their ordinary dividends. However, if the dividends were qualified, they would pay a 15% tax rate, based on their income, resulting in $1,500 in taxes.
In another scenario, if the investor has a taxable income of $1 million per year, excluding dividends, and falls into the 37% top marginal tax bracket, they would owe $37,000 in federal taxes on ordinary dividends. However, if the dividends were qualified, they would owe only $20,000 in federal taxes, resulting in a $17,000 savings.
Minimizing Taxes on Dividends
There are a few strategies to minimize taxes paid on dividends. One approach is to aim for qualified dividends, which are subject to lower tax rates than nonqualified dividends. Another method is to open a tax-advantaged brokerage account, such as an Individual Retirement Account (IRA), where taxes can be deferred until the investor is in a lower income tax bracket upon withdrawal.
In conclusion, the tax treatment of dividends in the U.S. depends on whether they are classified as qualified or ordinary dividends. Qualified dividends are subject to lower tax rates, while ordinary dividends are taxed at standard federal income tax rates. It's important for investors to understand the tax implications of dividends and consider strategies to minimize their tax liability.
I hope this information helps! Let me know if you have any further questions.
