How dividends are taxed in the US: qualified vs ordinary

If you own stocks or funds that pay dividends, those payments are taxable income. How much you owe depends on whether the IRS classifies each dividend as "ordinary" or "qualified," and the gap between those two categories is significant.

Ordinary dividends

Ordinary dividends are the default. Unless a dividend meets specific criteria for preferential treatment, it is taxed at the same rates as your salary. For the 2026 tax year, that means 10% to 37% depending on your income and filing status.

A single filer with $80,000 in taxable income who receives $2,000 in ordinary dividends pays 22% on those dividends, or $440 federal.

Dividends that almost always remain ordinary: money market fund distributions, bond fund distributions, short-term capital gain distributions from mutual funds, and dividends on shares you held for a very short time.

Qualified dividends

Qualified dividends are taxed at 0%, 15%, or 20%, which is much lower than ordinary rates for most people. Two requirements must be met.

The dividend must come from a qualifying entity. This means a US corporation or a qualified foreign corporation (one eligible under a US tax treaty, or whose stock trades on a major US exchange). Most dividends from NYSE and NASDAQ-listed stocks qualify. Many ADRs do too, provided the company is in a treaty country.

You must meet the holding period. You need to hold the stock for at least 61 days during the 121-day window centered on the ex-dividend date (60 days before through 60 days after). The purchase day does not count, but the sale day does.

Example: A stock has an ex-dividend date of June 15. The window runs April 16 through August 14. If you bought on May 1, you have held 45 days by June 15 (counting from May 2). You need to hold until at least July 1 to reach 61 days. Sell on June 30 and you only have 60 days, so the dividend does not qualify.

This rule exists to prevent buying right before ex-dividend, collecting the payment, and selling immediately while claiming the lower rate.

2026 qualified dividend rates

A single filer with $100,000 income receiving $5,000 in dividends pays $1,200 if ordinary (24%) but $750 if qualified (15%). That is $450 saved on the same income. Over years of investing, this compounds meaningfully.

REITs and MLPs

Not all dividend payers generate qualified dividends.

REITs must distribute at least 90% of taxable income to shareholders. Because REITs skip corporate tax on distributed income, the dividends are generally ordinary. However, they may qualify for the Section 199A QBI deduction, which lets eligible taxpayers deduct up to 20% of REIT dividends, effectively lowering the rate.

MLP distributions are typically treated as return of capital, reducing your cost basis rather than creating current taxable income. When distributions exceed your basis, the excess becomes a capital gain. MLP tax treatment is reported on Schedule K-1 (not 1099-DIV) and can include a mix of ordinary income, capital gains, and return of capital.

Reading your 1099-DIV

Your broker sends Form 1099-DIV by early February each year. The key boxes:

A common confusion: Box 1b is a subset of Box 1a, not a separate amount. If 1a shows $3,000 and 1b shows $2,500, you have $2,500 qualified (lower rate) and $500 ordinary (higher rate).

You report these on Schedule B if total ordinary dividends exceed $1,500. Qualified dividends flow to the Qualified Dividends and Capital Gain Tax Worksheet or Schedule D for the preferential rate.

Net investment income tax (NIIT)

If your MAGI exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately), you owe an additional 3.8% on investment income, including dividends.

Example: A single filer with $220,000 MAGI and $8,000 in qualified dividends. The NIIT applies to the lesser of net investment income ($8,000) or excess over threshold ($20,000). The full $8,000 is subject to NIIT: $8,000 x 3.8% = $304 extra. Combined with the 15% qualified rate, the effective rate is 18.8%.

State taxes

Federal is only part of the picture. Nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) do not tax dividends. Some states follow federal qualified/ordinary treatment. Others tax all dividends as ordinary income regardless of classification.

Combined federal and state rates can range from 0% (low income, no-tax state) to over 50% (high income, high-tax state, 20% qualified + 3.8% NIIT + state tax).

Tracking dividends with TrackMyShares

When you record a dividend in TrackMyShares, the payment amount and date are tracked by holding, creating a complete history that makes 1099-DIV reconciliation straightforward.

The dividend calendar shows projected payments by month and holding, useful for cash flow planning. Based on current holdings and yields, TrackMyShares projects your annual dividend income for the year ahead.

If you hold dividend-paying stocks across multiple brokers, you can import everything into TrackMyShares for a single consolidated view instead of cross-referencing multiple 1099-DIVs. Learn more in our guide on tracking dividend income across multiple brokers.

The US capital gains tax report includes dividend income alongside capital gains and losses for a complete picture of your investment tax obligations for the 2025 tax year.

Sign up for TrackMyShares to track dividend income, plan your tax obligations, and keep everything organized as you prepare for the April 2026 filing deadline.

This is general information, not personal tax or financial advice.