How Dividends Are Taxed: Qualified vs Ordinary Rates

A dividend is taxed at the low long-term capital gains rates (0%, 15%, or 20%) when it is "qualified," which requires two things: it must come from a U.S. corporation or a qualified foreign corporation, and you must have held the shares more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Every other dividend is ordinary income taxed at your regular rate. Your broker sorts them on Form 1099-DIV, but the holding period test is ultimately yours to meet.

This article explains the rules and the paperwork. For 2026 rate tables and examples at different incomes, see dividend tax rates: qualified vs. ordinary, and to estimate your tax, use the dividend tax calculator.

Test 1: Who paid the dividend

Under Publication 550, dividends from U.S. corporations can be qualified. A foreign corporation's dividends can be qualified if any one of these is true:

1. It is incorporated in a U.S. territory.
2. It is eligible for the benefits of a comprehensive U.S. income tax treaty that Treasury has approved for this purpose.
3. The shares paying the dividend are readily tradable on an established U.S. securities market (for example, an American depositary receipt listed on a U.S. exchange).

A company that is a passive foreign investment company in the year of the dividend or the year before is never a qualified foreign corporation.

Test 2: How long you held the shares

The holding period is where qualified treatment is most often lost. Publication 550 requires more than 60 days of ownership within the 121-day window that starts 60 days before the ex-dividend date. Count the day you sold but not the day you bought.

Example: fails the test. You buy 1,000 shares on June 2, 2026. The ex-dividend date is June 9, 2026. You sell on July 3, 2026.

• Window: April 10, 2026 through August 8, 2026 (121 days starting 60 days before the ex-date)
• Days held within the window: June 3 through July 3 = 31 days
• 31 is not more than 60, so the dividend is ordinary, even if your 1099-DIV shows it in box 1b

Example: passes the test. Same purchase, but you sell on August 5, 2026. Days held within the window: June 3 through August 5 = 64 days. The dividend is qualified.

Preferred stock with dividends attributable to periods totaling more than 366 days has a longer test: more than 90 days in the 181-day period beginning 90 days before the ex-dividend date.

Brokers fill in box 1b based on the security, not on your trading, so if you trade around dividend dates, check the test yourself and report the dividend as ordinary when it fails.

Payments that are never qualified dividends

Publication 550 lists items that are not qualified dividends even if they appear in box 1b:

• Capital gain distributions (taxed separately as long-term gains)
• "Dividends" on deposits at credit unions, savings and loans, mutual savings banks, and similar institutions — these are interest
• Dividends from a tax-exempt organization or farmers' cooperative
• Dividends on employer stock held by an ESOP
• Dividends to the extent you are obligated to make related payments on substantially similar positions, such as under a short sale
• Payments in lieu of dividends from a broker that lent out your shares, if you know or have reason to know they are not qualified

Most REIT distributions are also not qualified dividends; they are covered below.

Reading Form 1099-DIV, box by box

The subsets matter for avoiding double counting: box 1b and box 5 are already inside box 1a, and boxes 2b–2d are inside 2a.

Where dividends go on your return

Publication 550's reporting table puts:

• Qualified dividends (box 1b) on Form 1040, line 3a
• Ordinary dividends (box 1a) on line 3b
• Capital gain distributions (box 2a) on line 7a, or Schedule D line 13 if you must file Schedule D

You must also list each payer on Schedule B, Part II, if your ordinary dividends exceed $1,500 or you received dividends as a nominee.

The worksheet that applies the lower rate

Line 3a does not reduce your tax by itself. The Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions separates preferential income from ordinary income and taxes each at its own rate.

Example (2026, married filing jointly): wages $120,000; interest $1,000; ordinary dividends $9,000, of which $7,500 is qualified; capital gain distributions $2,000.

1. AGI: $120,000 + $1,000 + $9,000 + $2,000 = $132,000
2. Taxable income after the $32,200 standard deduction: $99,800
3. Preferential income: $7,500 + $2,000 = $9,500
4. Ordinary taxable income: $99,800 − $9,500 = $90,300, taxed at regular rates: $2,480 (10% on $24,800) + $7,860 (12% on $65,500) = $10,340
5. 0% room: the joint 0% ceiling is $98,900, so $98,900 − $90,300 = $8,600 is taxed at 0%
6. Remaining $900 at 15% = $135
7. Total tax: $10,475

Without the worksheet, regular tax on $99,800 would be $11,480. The preferential rates save $1,005.

Reinvested dividends and return of capital

Reinvested dividends are taxable when paid, even though you never see the cash. Each reinvestment buys shares at a new cost, which becomes part of your basis. If you forget to add them, you will overstate your gain when you sell and pay tax on the same dividends twice.

Return of capital (box 3) is not taxed when received. It reduces your basis in the shares. Once basis reaches zero, further nondividend distributions are taxed as capital gains.

REIT dividends and the 45-day rule

The ordinary-income portion of a REIT's dividends is usually reported in box 5 as section 199A dividends. You can deduct 20% of qualified REIT dividends on Form 8995, but the Form 1099-DIV instructions exclude dividends on REIT shares held 45 days or less during the 91-day period beginning 45 days before the ex-dividend date. REITs often cannot track that for each shareholder and report the full amount in box 5 anyway, so the test is yours to check.

Foreign dividends and the foreign tax credit

Foreign governments often withhold tax on dividends, shown in box 7. You can claim a credit against U.S. tax. The IRS lets you skip Form 1116 when all of your foreign income is passive, it is all reported on payee statements such as a 1099-DIV, your creditable foreign taxes are $300 or less ($600 joint), and you elect the simplified method. Unused foreign tax from that year cannot be carried back or forward under the election. A treaty-country dividend can still be qualified for U.S. purposes even though foreign tax was withheld.

Fund distributions: timing and character

Mutual funds and ETFs pass through the character of what they earn: qualified dividends from the stocks they hold, ordinary dividends from interest and short-term gains, and capital gain distributions from long-term sales. Two practical points:

• Buying just before a distribution means receiving part of your purchase price back as a taxable distribution. In a taxable account, check the fund's estimated distribution date before investing a large sum late in the year.
• The fund's holding period and yours both count. The fund must meet the holding test on the underlying stocks, and you must meet it on the fund shares for its qualified dividends to be qualified to you.

The 3.8% net investment income tax

All dividends count as net investment income. IRS Topic 559 applies 3.8% to the lesser of your net investment income or the amount your modified AGI exceeds $200,000 single, $250,000 joint, or $125,000 married filing separately. It is figured on Form 8960; the NIIT calculator estimates it.

Dividend tax checklist

1. Confirm box 1b against your own holding periods if you traded near ex-dividend dates.
2. Add reinvested dividends to basis each year.
3. Subtract box 3 return of capital from basis.
4. File Schedule B if box 1a totals exceed $1,500.
5. Use the worksheet (or software) so line 3a actually gets the lower rate.
6. Check the 45-day REIT test before claiming the section 199A deduction.

For selling the shares themselves, the capital gains calculator applies the same 0/15/20% bands to your gains.