Points to know
Dividends are payments of income from companies in which you own stock. If you own stocks through mutual funds or ETFs (exchange-traded funds), the company will pay the dividend to the fund, which will then be passed on to you through a fund dividend.
Buying a security just before the dividend distribution date means you won't be entitled to the upcoming dividend payment, as you need to own the security by the record date to qualify for the dividend. Because dividends are taxable, buying shares of a stock or a fund right before a dividend is paid can have tax implications.
Dividend income and capital gains are 2 distinct ways investors can earn money from their investments. Dividend income is generated when a company distributes a portion of its profits to shareholders, typically paid out quarterly. Dividends are taxed either as ordinary income or at a lower qualified dividend rate, depending on the type of dividend and how long you've held the security.
Capital gains, on the other hand, are realized when an investor sells an asset for more than the original purchase price. The gain is classified as either short-term (if the asset was held for less than a year) or long-term (if held for more than a year). Long-term gains are typically taxed at a lower rate than short-term gains, which are taxed as ordinary income. Understanding these differences is one of the keys to effective tax planning and a thoughtful investment strategy.
Dividends are taxed differently based on whether they're classified as qualified or ordinary.
Qualified dividends, which come from domestic or qualified foreign corporations and are subject to specific holding-period requirements, are taxed at the lower long-term capital gains rate. This rate is generally more favorable than the ordinary income tax rate and can range from 0% to 20%, depending on your income bracket.
Ordinary dividends are taxed at the higher ordinary income tax rate, which is the same rate applied to your regular salary or wages. This can be significantly higher, especially for those in higher income tax brackets. Understanding these tax implications is crucial for optimizing your investment strategy and minimizing your tax liability.
A qualified dividend is a type of dividend that meets specific IRS criteria and is taxed at a lower capital gains rate rather than the higher ordinary income tax rate.
Qualified dividends and the 61-day holding period rule
Qualified dividends are eligible for special tax treatment, which means they're taxed at the lower long-term capital gains rate, typically ranging from 0% to 20%, depending on your income bracket. To be considered qualified, dividends must meet the 61-day* holding requirement. Specifically, you must hold the stock for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date. This rule ensures the investor has a meaningful stake in the company and isn't just buying and selling the stock to capture the dividend payment.
* refers to calendar days
Ex-dividend date and its role
The ex-dividend date is a key date in the dividend payment process. It's the date on which the stock begins trading without the right to the upcoming dividend. If you purchase the stock on or after the ex-dividend date, you won't receive the dividend that's about to be paid. For a dividend to be qualified, the holding period must include the ex-dividend date. This means that if you buy the stock before the ex-dividend date and hold it for more than 60 days during the 121-day period, the dividend will be considered qualified.
Let's look at an example. Say you're considering investing in a U.S. corporation's common stock. The company announces a dividend and sets the ex-dividend date for October 15, 2025. To ensure the dividend is qualified, you need to hold the stock for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date. Here's how it works:
121-day period. The 121-day period starts 60 days before the ex-dividend date, which is August 16, 2025, and ends on December 14, 2025.
Holding requirement. You must hold the stock for more than 60 days within this 121-day period. For example, if you buy the stock on August 1, 2025, and sell it on December 1, 2025, you'll have held it for 122 days, which meets the 61-day holding requirement. Therefore, the dividend you receive will be qualified.
Nonqualified scenario. If you buy the stock on October 16, 2025, and sell it on December 15, 2025, you'll have held it for 61 days. However, since you didn't hold the security for more than 60 days during the 121-day period that includes the ex-dividend date, the dividend will be nonqualified and taxed at the higher ordinary income tax rate.
Qualified versus nonqualified dividend comparison
The ex-dividend rate is applicable to other securities by determining the date after which a security trades without the right to the upcoming dividend or distribution.
Ordinary dividends, also known as nonqualified dividends, are dividend payments that don't meet the specific criteria required to be classified as qualified dividends, such as the 61-day holding period rule.
Ordinary dividends are taxed at the regular income tax rates, which are the same rates applied to your salary or wages.
This means that the tax rate on ordinary dividends can be significantly higher, especially for investors in higher income brackets. Understanding the difference between qualified and ordinary dividends is essential for effective tax planning, as it can impact the overall return on your investments.
Ordinary dividends are taxed at the regular income tax rates, which are the same rates applied to your salary or wages. Qualified dividends are subject to a 0%, 15%, or 20% tax rate, depending on your level of taxable income.1
The chart below outlines the 2024 dividend tax rates for various filing statuses, showing a comparison of how different statuses can affect your tax liability.
Single
| Tax rate | Dividend income |
| 0% | $0 to $47,025 |
| 15% | $47,026 to $518,900 |
| 20% | $518,901 or more |
Married filing jointly
| Tax rate | Dividend income |
| 0% | $0 to $94,050 |
| 15% | $94,050 to $583,750 |
| 20% | $583,751 or more |
Married filing separately
| Tax rate | Dividend income |
| 0% | $0 to $47,025 |
| 15% | $47,0256 to $291,850 |
| 20% | $291,851 or more |
Head of household
| Tax rate | Dividend income |
| 0% | $0 to $63,000 |
| 15% | $63,001 to $551,350 |
| 20% | $551,351 or more |
The chart below outlines the 2025 dividend tax rates for various filing statuses, showing a comparison of how different statuses can affect your tax liability.
Single
| Tax rate | Dividend income |
| 0% | $0 to $48,350 |
| 15% | $48,351 to $533,400 |
| 20% | $533,401 or more |
Married filing jointly
| Tax rate | Dividend income |
| 0% | $0 to $96,700 |
| 15% | $96,701 to $600,050 |
| 20% | $600,051 or more |
Married filing separately
| Tax rate | Dividend income |
| 0% | $0 to $48,350 |
| 15% | $48,351 to $300,000 |
| 20% | $300,001 or more |
Head of household
| Tax rate | Dividend income |
| 0% | $0 to $64,750 |
| 15% | $64,750 to $566,700 |
| 20% | $566,701 or more |
Dividend income is reported to both you and the IRS on Form 1099-DIV.
This form is typically issued by your brokerage or financial institution by the end of January for dividends received in the previous year.
The 1099-DIV form includes several important pieces of information:
Understanding the information on your 1099-DIV form is crucial for accurately reporting your dividend income on your tax return and ensuring you pay the correct amount of tax.
1Dividends that are nonqualified are taxed at your usual income tax rate.
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
The information contained herein does not constitute tax advice, and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about their individual situation before investing in any fund or ETF.