How dividends are taxed in the US: qualified vs ordinary

If you own stocks or funds that pay dividends, those payments are taxable income in the United States. How much tax you owe depends on whether the dividend is classified as "ordinary" or "qualified," and the difference between those two categories can have a significant impact on your after-tax returns.

In this guide, we break down how each type of dividend is taxed, walk through the IRS rules for qualification, and explain how to track and report your dividend income accurately.

Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Consult a qualified tax professional before making investment decisions based on tax considerations.

Ordinary dividends

Ordinary dividends are the default classification for dividend income. Unless a dividend meets specific criteria to qualify for preferential tax treatment (covered in the next section), the IRS treats it as ordinary income.

Ordinary dividends are taxed at the same rates as your wages, salary, and other earned income. For the 2026 tax year, federal income tax rates range from 10% to 37%, depending on your taxable income and filing status.

2026 ordinary income tax rates

For example, if you are a single filer with $80,000 in taxable income and you receive $2,000 in ordinary dividends, those dividends are taxed at your marginal rate. In this case, the $2,000 would fall within the 22% bracket, resulting in $440 of federal tax on the dividend income.

Common sources of ordinary dividends

Most dividends you receive will start out classified as ordinary dividends. Some types of dividends almost always remain ordinary:

• Money market fund distributions are typically ordinary dividends
• Bond fund distributions are generally ordinary
• Short-term capital gain distributions from mutual funds are treated as ordinary dividends
• Dividends on shares you held for a very short time may not meet the qualified holding period

Qualified dividends

Qualified dividends receive preferential tax treatment, with rates of 0%, 15%, or 20%, which are significantly lower than ordinary income tax rates for most taxpayers. To be classified as qualified, a dividend must meet two requirements set by the IRS.

Requirement 1: The dividend must be paid by a qualifying entity

The dividend must be paid by one of the following:

• A US corporation (including US-based companies listed on major exchanges)
• A qualified foreign corporation, which generally means a company incorporated in a US possession, a company eligible for benefits under a US tax treaty, or a company whose stock is readily tradable on an established US securities market

Most dividends from stocks listed on the NYSE, NASDAQ, or other major US exchanges will meet this requirement. Dividends from many foreign companies traded as American Depositary Receipts (ADRs) on US exchanges also qualify, provided the company is in a country with a qualifying tax treaty.

Requirement 2: The holding period must be met

You must hold the stock for at least 61 days during the 121-day period that begins 60 days before the ex-dividend date.

The ex-dividend date is the first date on which new buyers of the stock are not entitled to the upcoming dividend payment. If you buy shares on or after the ex-dividend date, you will not receive that particular dividend.

Here is how the window works in practice:

1. Identify the ex-dividend date
2. Count back 60 days from that date to find the start of the 121-day window
3. Count forward 60 days from the ex-dividend date to find the end of the window
4. You must have held the stock for more than 60 days (at least 61 days) within that window

The day you purchased the stock does not count, but the day you sold it does.

Worked example: holding period

Suppose a stock has an ex-dividend date of June 15. The 121-day window runs from April 16 through August 14. If you purchased the stock on May 1 and held it continuously, by June 15 you have held it for 45 days (May 2 through June 15). You need to continue holding until at least July 1 to reach the 61-day minimum. If you sell on June 30, you only have 60 days and the dividend does not qualify for the lower rate.

This requirement exists to prevent investors from buying a stock right before the ex-dividend date, collecting the dividend, and immediately selling, all while claiming the lower qualified rate.

2026 qualified dividend tax rates

The difference between ordinary and qualified rates can be substantial. Consider a single filer with $100,000 in taxable income who receives $5,000 in dividends. If those dividends are ordinary, they are taxed at 24%, resulting in $1,200 of tax. If they are qualified, the tax rate is 15%, resulting in $750 of tax. That is a $450 saving on $5,000 of dividend income.

Worked example: tax savings

Let's say you are married filing jointly with $150,000 in taxable income and receive $10,000 in dividends from US stocks you have held for over a year.

• If ordinary: The dividends are taxed at your marginal rate of 22%, costing you $2,200 in federal tax
• If qualified: The dividends are taxed at 15%, costing you $1,500 in federal tax
• Savings: $700 just because the dividends meet the qualified criteria

Over a career of investing, this difference compounds meaningfully.

REITs and MLPs: usually ordinary dividends

Not all dividend-paying investments generate qualified dividends. Two common categories stand out.

Real estate investment trusts (REITs)

REITs are required to distribute at least 90% of their taxable income to shareholders. Because REITs do not pay corporate tax on the income they distribute, the dividends paid to shareholders are generally classified as ordinary income, not qualified dividends.

However, REIT dividends may be eligible for the Section 199A qualified business income (QBI) deduction, which allows eligible taxpayers to deduct up to 20% of qualified REIT dividends. This effectively reduces the tax rate on REIT dividends, even though they are not classified as qualified dividends.

Master limited partnerships (MLPs)

MLP distributions are typically treated as a return of capital, which reduces your cost basis rather than being taxed as income in the current year. When distributions exceed your cost basis, the excess is taxed as a capital gain. MLP tax treatment is complex, and the distributions reported on a Schedule K-1 (rather than a 1099-DIV) can include ordinary income, capital gains, and return of capital in varying proportions.

How your 1099-DIV reports dividends

Each January or early February, your broker sends you a Form 1099-DIV summarizing the dividend income you received during the prior calendar year. Here are the key boxes to understand:

A common point of confusion: Box 1b (qualified dividends) is a subset of Box 1a (total ordinary dividends), not a separate amount. If Box 1a shows $3,000 and Box 1b shows $2,500, you have $2,500 in qualified dividends (taxed at the lower rate) and $500 in ordinary dividends that are not qualified (taxed at ordinary income rates).

When you file your tax return, you report the amounts from your 1099-DIV on Schedule B if your total ordinary dividends exceed $1,500. The qualified dividends from Box 1b flow through to the Qualified Dividends and Capital Gain Tax Worksheet or Schedule D, where they receive the preferential tax rate.

Net investment income tax (NIIT)

Higher-income taxpayers may owe an additional 3.8% tax on their dividend income through the Net Investment Income Tax. The NIIT applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds these thresholds:

• Single filers: $200,000
• Married filing jointly: $250,000
• Married filing separately: $125,000

Net investment income includes both ordinary and qualified dividends, along with capital gains, interest, rental income, and royalties. If your MAGI exceeds the threshold, the 3.8% NIIT is applied on top of the regular dividend tax rate.

Worked example: NIIT impact

A single filer with a MAGI of $220,000 receives $8,000 in qualified dividends. The NIIT applies to the lesser of:

• Net investment income: $8,000
• Excess over threshold: $220,000 - $200,000 = $20,000

Since $8,000 is less than $20,000, the NIIT applies to the full $8,000. The additional tax is $8,000 x 3.8% = $304. Combined with the 15% qualified dividend rate, the effective rate on those dividends is 18.8%.

State taxes on dividends

Federal taxes are only part of the picture. Most states also tax dividend income, and the treatment varies significantly:

• No state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax wages or dividends
• States that follow federal treatment: Many states tax qualified dividends at the same preferential rate as the federal government, or offer a partial exclusion
• States that tax all dividends as ordinary income: Some states do not distinguish between qualified and ordinary dividends, taxing both at the state's ordinary income tax rate

The combined federal and state tax on dividends can vary from 0% (for low-income filers in no-income-tax states) to over 50% (for high-income filers in high-tax states paying the 20% qualified rate plus 3.8% NIIT plus state tax). Knowing your state's treatment is important for accurate tax planning.

Tracking dividends with TrackMyShares

Managing dividend income across multiple holdings and accounts can be challenging, especially when you need to track which dividends are qualified versus ordinary for tax purposes. TrackMyShares provides several tools to help.

Dividend recording and classification

When you record a dividend transaction in TrackMyShares, you can track the payment amount and date. This creates a complete history of your dividend income by holding, making it easier to reconcile with your 1099-DIV at tax time.

Dividend calendar

The dividend calendar shows your projected dividend payments for the year, broken down by month and holding. This helps you plan for upcoming income and understand your cash flow from dividends throughout the year.

Projected annual income

Based on your current holdings and their dividend yields, TrackMyShares projects your annual dividend income. This gives you a forward-looking view of how much dividend income to expect, which is useful for tax planning and budgeting.

Consolidated view across brokers

If you hold dividend-paying stocks across multiple brokerage accounts, you can import all your holdings into TrackMyShares and see your total dividend income in one place. Rather than checking separate 1099-DIVs from each broker, you have a unified view of your dividend activity. Learn more in our guide on tracking dividend income across multiple brokers.

Tax reports

The US capital gains tax report includes your dividend income alongside your capital gains and losses, giving you a comprehensive picture of your investment tax obligations for the year.

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Dividend taxation is one of those areas where understanding the rules can directly save you money. Knowing the difference between qualified and ordinary dividends, meeting the holding period requirements, and tracking your income accurately all contribute to a lower tax bill.

Sign up for TrackMyShares to track your dividend income, plan your tax obligations, and keep everything organized across all your brokerage accounts.