How Are Dividends Taxed In the US

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise US Inc. or its affiliates, and it is not intended as a substitute for obtaining business advice from a Certified Public Accountant (CPA) or tax lawyer.

Dividends can be a powerful source of income if you’re looking to build wealth through investments. But before you start counting your quarterly checks, it’s important to understand how Uncle Sam treats those payouts. Not all dividends are taxed equally; some enjoy lower tax rates, while others are hit with ordinary income tax.¹

It’s important to know the difference between qualified dividends and ordinary (or non-qualified) dividends. This is a distinction that can have a real impact on your bottom line, especially if you're investing for the long haul or planning your tax strategy.²

So let’s take a look at the basics of dividend taxation in the United States, including what qualifies a dividend for favorable treatment, what rates to expect, and how timing and holding periods come into play.

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Table of contents
What is a dividend? Why Companies Pay Dividends Who Can Receive Dividends? What are the different types of dividends? How are dividends taxed in the US? Save Time and Money On Overseas Payments With Wise Business Frequently Asked Questions (FAQs)

What is a dividend?

A dividend is basically a reward paid out to shareholders, usually in cash, just for owning a piece of a company. When a business turns a profit and has more cash than it needs to reinvest, it might choose to share a portion of those profits with its shareholders, that’s your dividend.

Not all companies pay them, though. Fast-growing startups often skip dividends to pour money back into growth. But more established, stable companies, such as utilities or blue-chip stocks, often pay regular dividends as a sign of financial strength. Receiving dividends can be a smart way to earn passive income, especially if you’re playing the long game with your investments.⁵

Why Companies Pay Dividends

Companies pay dividends for a few smart reasons, and no, it’s not just about rewarding shareholders. When a business is consistently profitable and doesn’t need to reinvest all its earnings, paying dividends is a way to share the wealth. Dividends can also attract investors looking for steady income, like retirees or long-term holders.

Established companies often use dividends to boost trust and show financial stability. It’s a signal that they’re confident about future earnings. While not every company pays them, especially younger, fast-growing ones, dividends remain a classic way for mature businesses to keep investors happy while reinforcing their reputation in the market.⁶

Who Can Receive Dividends?

Anyone who owns shares of a dividend-paying stock or fund can receive dividends; it's one of the perks of being a shareholder. If you hold shares when the company announces a dividend (specifically on the record date), you're eligible to receive it.⁵

Timing matters, though; you have to own the stock before the ex-dividend date to qualify. It doesn’t matter how many shares you own; dividends are typically paid on a per-share basis, so the more you own, the more you earn. Even beginners can take advantage of dividends as a steady income stream or a way to reinvest and grow wealth over time.

What are the different types of dividends?

Dividends are a powerful way to grow your wealth, but not all dividends are created equal. Understanding the different types of dividends is crucial in terms of understanding what you may or may not receive. Below is a look at the different types of dividends and what they mean for you.³

Ordinary Dividends

Ordinary dividends are the most common kind of payout investors receive, but they’re also the ones that can hit you hardest at tax time. Ordinary dividends are taxed at your regular income tax rate, just like wages or freelance income. That means if you're in a higher tax bracket, your dividend income could face a steep cut from Uncle Sam.¹

Most dividends paid out by real estate investment trusts (REITs), certain mutual funds, and some foreign companies fall into this category. While ordinary dividends still represent income and can be a nice reward for investing, it’s important to understand their tax impact.

Qualified Dividends

Qualified dividends are like the VIP version of dividend income; they’re taxed at a much lower rate than ordinary dividends, often at long-term capital gains tax rates of 0%, 15%, or 20%, depending on your income.¹ To qualify, the dividend must be paid by a U.S. corporation (or qualified foreign company), and you must hold the stock for a specific period, typically more than 60 days around the ex-dividend date.²

The lower tax rate can significantly boost your after-tax returns. Most regular dividends from well-established companies, especially blue-chip stocks, fall into this category.³

Unqualified Dividends

The term "unqualified dividends" is often used interchangeably with "ordinary dividends," but it really just means dividends that don’t meet the IRS rules to be taxed at the lower qualified rate.⁴ These could include payments from REITs, MLPs (master limited partnerships), and some foreign stocks. The issue here is that these dividends get taxed as regular income, which can take a bigger chunk out of your earnings, especially if you're in a higher tax bracket.¹

It's not that unqualified dividends are bad; they’re still income, but you need to factor in the heavier tax burden. When evaluating an investment, it’s wise to look not just at the yield, but also whether the dividends are qualified or unqualified. It could affect your net return more than you think.

Stock Dividends

Stock dividends are a different kind of reward. Instead of cash, you’re given additional shares of the company’s stock. It’s like reinvesting in your investment automatically.⁵ These are often issued by companies that want to reward shareholders but would rather keep their cash on hand for growth or operations. Stock dividends don’t provide immediate income, but they can enhance your long-term position by increasing your ownership.

Tax-wise, stock dividends are generally not taxable until you sell the shares, unless you’re given the option to take cash instead, then things can get tricky.⁶

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How are dividends taxed in the US?

Dividends can be a nice bonus for investors, but it’s important to know how they’re taxed in the U.S., because not all dividends are treated the same. There are two main types: qualified and ordinary (or non-qualified) dividends. Qualified dividends are taxed at the lower capital gains tax rates—0%, 15%, or 20%, depending on your income level, which can save you a good chunk of money.¹

Ordinary dividends are taxed at your regular income tax rate, which could be much higher.⁴ To qualify for the lower rate, the dividend must be paid by a U.S. corporation or qualified foreign company, and you need to have held the stock for a specific period of time.^2. Dividends are reported on your tax return, typically via a 1099-DIV form.⁷

Type Of Dividend	Description	Tax Treatment
Qualified Dividends	Paid by U.S. corporations or qualified foreign corporations; holding period met	Taxed at long-term capital gains rates (0%, 15%, or 20%)1
Unqualified Dividends	Most common: do not meet qualified dividend rules	Taxed at ordinary income tax rates (10% - 37%)1
Non-Dividend Distributions	Return of capital, not from profits	Not taxed initially, reduces the cost basis of the investment2
Capital Gain Distributions	From mutual funds or ETFs, profits from asset sales	Taxed as capital gains (usually long-term)3
Stock Dividends	Paid in additional shares instead of cash	Not taxed when received, unless there’s a cash option4
Special Dividends	One-time payments, often from excess cash or asset sales	Taxed as qualified or ordinary, depending on circumstances5
Ordinary Dividends	Most common: do not meet qualified dividend rules	Taxed at ordinary income tax rates (10% - 37%)1

Final thoughts

Understanding how dividends are taxed might not be the most exciting part of investing, but it’s one of the most important. The good news is that with the right strategy, like using tax-advantaged accounts or paying attention to holding periods, you can make dividends work harder for you. So don’t just focus on what a stock pays you; think about what you actually get to keep, and how you can increase your overall income with investments.

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Frequently Asked Questions (FAQs)

Do I owe taxes on dividends if I reinvest them automatically?

Yes, reinvested dividends are still taxable in the year they're paid, even if you don’t receive the cash directly, so keep this in mind.⁷

Are dividends from a Roth IRA taxable?

No, dividends earned within a Roth IRA are not taxable, as long as you follow the withdrawal rule.⁶ That means if you're at least 59½ and have had the account for five years, any growth, including dividends, is completely tax-free. Even if you reinvest dividends in the account, you won’t pay taxes now or in retirement. It’s one of the biggest perks of using a Roth IRA for long-term, dividend-focused investing.

Can I offset dividend income with investment losses?

Not directly. Dividend income is considered ordinary or qualified income, while capital losses are used to offset capital gains. However, if you have more losses than gains, you can deduct up to $3,000 per year against other income (like dividends), and carry forward any remaining losses to future years.⁵

How are foreign dividends taxed in the U.S.?

Foreign dividends are usually taxed at ordinary income tax rates unless they meet the criteria to be considered qualified.⁶ Many foreign countries withhold their own taxes from dividend payments before you even receive them. The good news is that you may be able to claim a foreign tax credit on your U.S. tax return, which helps reduce double taxation.

How do I report dividends on my tax return?

Dividends are reported to you on Form 1099-DIV, which is usually sent by your broker in January, to be paid in February.⁴ If your total dividends exceed $1,500, you’ll also need to fill out Schedule B on your tax return. Qualified dividends are usually listed in box 1b of the form, while ordinary dividends are in box 1a.

What happens if I get dividends from a stock I hold for a short time?

If you don’t hold the stock long enough, usually at least 61 days around the ex-dividend date, the dividend is considered unqualified and taxed at your higher, ordinary income tax rate.⁵ This rule is meant to prevent people from buying a stock just to collect the dividend and then selling immediately. Holding period rules are important if you want to benefit from the lower tax rate that comes with qualified dividends.

Are inherited dividends taxed differently?

No, dividends earned on inherited stocks are taxed the same as any other, either as qualified or ordinary income.⁵ However, when you inherit stock, the cost basis is usually “stepped up” to the value at the date of death. That means future capital gains taxes may be lower if you sell the stock, but the dividend income you receive while holding it is still taxable in the year it’s paid to you.

Do children have to pay taxes on dividends in custodial accounts?

Yes, they do. If a child earns more than a certain threshold (over $2,600 in 2025), the kiddie tax may apply.⁴ This means any unearned income above the threshold, like dividends, will be taxed at the parents' higher tax rate, not the child’s lower one.

Can dividend-paying ETFs be more tax-efficient than mutual funds?

Often, yes. Thanks to their “in-kind redemption” structure, ETFs generally trigger fewer taxable events compared to mutual funds.⁴ This can result in fewer capital gains distributions and a more tax-efficient experience overall. However, the dividends themselves, qualified or not, are still taxed the same way as those from mutual funds.

Is there a way to avoid taxes on dividends altogether?

Yes, by using tax-advantaged accounts like Roth IRAs, Traditional IRAs, or 401(k)s.⁵ Inside these accounts, dividends can grow tax-free or tax-deferred. Roth IRAs often offer the best deal, allowing dividends to grow and be withdrawn tax-free in retirement. Traditional accounts defer taxes until you withdraw the funds. Either way, you avoid annual taxes on dividends while your investments grow.

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Sources:

1. How are dividends taxed? Qualified and nonqualified dividend tax rates | NerdWallet
2. What are qualified dividends, and how are they taxed | Investopedia
3. Taxes on dividend income | Vanguard
4. Topic no. 404, Dividends | IRS
5. How are dividends taxed | Yahoo!Finance
6. Is there a dividend tax? Your guide to taxes on dividends | Intuit TurboTax
7. Instructions for form 1099-DIV | IRS