How Dividends and Distributions Are Taxed: Qualified vs Ordinary Income  

Dividend Taxes 101: Qualified vs Ordinary Dividends Explained

Dividends are payments companies make to investors from their profits. Simple in theory, but at tax time, they can get surprisingly tricky.

Why? Because not all dividends are taxed the same way.

Before you can figure out how much tax you owe, you need to know whether your dividend is qualified or ordinary (non-qualified). That classification alone can mean paying a much lower or a much higher tax rate.

First things first: Are dividends taxable?

Yes. In most cases, dividends are taxable in the year you receive them, even if you automatically reinvest them.

It doesn’t matter whether:

• You take the dividend as cash, or
• You reinvest it through a dividend reinvestment plan (DRIP)

If it hits your account, the IRS generally considers it taxable income.

What are qualified dividends?

Qualified dividends get the VIP tax treatment.

If a dividend meets IRS requirements, it’s taxed at lower capital gains rates instead of ordinary income tax rates.

Qualified dividends are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status for the 2025 tax year. Often, much lower than regular income tax rates

To qualify, the dividend must:

• Be paid by a U.S. company (or certain qualified foreign companies)
• Meet specific holding period requirements (more on that below)

Source: IRS Pub. 550, Qualified Dividends

What are ordinary (non-qualified) dividends?

Ordinary dividends don’t qualify for special treatment—hence the name.

These dividends:

• Don’t meet IRS qualification rules
• Are taxed at regular income tax rates. For 2025, the range is 10% to 37%, depending on your tax bracket.

In short, ordinary dividends typically result in a larger tax bill.

Source: IRS Instructions for Form 1040

Why the difference matters

Here’s the big takeaway:

• Qualified dividends = lower tax rates
• Ordinary dividends = taxed like wages or salary

Higher-income taxpayers may also owe the 3.8% Net Investment Income Tax if modified AGI exceeds $200,000 (Single) or $250,000 (Married Filing Jointly).

That’s why knowing which type of dividend you received isn’t just helpful; it directly affects how much tax you pay.

Source: IRS Form 8960 Instructions

Next Step: Want the full picture on how investment income impacts your taxes? Check out our Stock & Investment Taxes guide to see how dividends, capital gains, and distributions all work together.

The 60-Day Holding Period Requirement

To receive preferential rates on a qualified dividend, you must hold the stock more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Example: If a stock's ex-dividend date is March 15, the 121-day window is approximately January 13 through May 13. You must hold the stock for at least 61 days within that window.

What this prevents: Investors can't simply buy stock right before a dividend, collect it at the qualified rate, and immediately sell. The holding period rule ensures you actually owned the stock for a meaningful period.

If the holding period isn't met, the dividend is treated as ordinary (not qualified) and taxed at ordinary income rates regardless of whether the issuing corporation otherwise qualifies.

Source: IRS Pub. 550

Next Step: One of the best ways to stay organized is to create spreadsheets to track dividend payments. Keeping these records can help you better understand your tax liabilities and obligations at tax time.

Dividend Tax Rates VS Ordinary Income Tax Rates

Once you understand the difference between qualified and ordinary dividends, this side-by-side comparison shows how their tax treatment impacts what you actually owe.

Qualified vs. Ordinary Dividend Tax Rates

Because dividends are taxed differently based on classification, identifying whether dividends qualify for favorable tax treatment is a key step in accurate tax reporting.

REIT Dividends Are a Special Case

Real Estate Investment Trust (REIT) dividends are generally NOT qualified dividends — they're taxed at ordinary income rates rather than preferential rates.

However, REIT ordinary dividends may qualify for the Section 199A Qualified Business Income deduction, which allows a 20% deduction on qualified REIT dividends through 2025 (subject to extension by Congress).

Practical effect: A REIT dividend taxed at a 32% ordinary rate effectively becomes ~25.6% after the Section 199A deduction. Still higher than the 15%–20% qualified dividend rate, but better than full ordinary treatment.

Most REIT investors should ensure their tax preparation software is correctly applying the 199A deduction.

Mutual Fund Capital Gain Distributions

Mutual funds and ETFs sometimes distribute capital gains to shareholders, separate from dividends. These appear in Box 2a of Form 1099-DIV.

Key point: Capital gain distributions are always taxed as long-term capital gains, regardless of how long you've held the fund. Even if you bought the fund yesterday, a capital gain distribution received today receives long-term treatment.

This is why mutual funds can produce surprise tax bills late in the year — particularly in down markets when funds sell appreciated holdings to meet redemptions.

ETFs are generally more tax-efficient because the in-kind redemption mechanism rarely triggers capital gain distributions to shareholders.

Source: IRS Pub. 550

Reinvested Dividends Increase Your Cost Basis

When you participate in a DRIP (Dividend Reinvestment Plan), dividends are automatically used to purchase additional shares.

Two things happen for tax purposes:

1. The dividend itself is taxable in the year received, even though you didn't take cash
2. The reinvestment is treated as a new purchase, with its own cost basis equal to the dividend amount

When you eventually sell, your total cost basis includes:

• Original purchase price
• PLUS all dividends that were reinvested over the years

Failing to track reinvested dividends can result in double taxation — paying tax on the dividend in the year received, then paying capital gains tax on the same amount when you sell because you forgot to add it to basis.

See our Cost Basis guide for detailed tracking guidance.

How Dividends and Distributions Are Reported on Form 1099-DIV

When you report dividend income, you’ll use IRS Form 1099 DIV. In Box 1a, you’ll report your total taxable dividend income from ordinary dividends, including anything you reinvested. In Box 1b, you’ll report qualified dividends that are eligible for lower tax rates.

While dividends are reported on Form 1099-DIV, stock sales are reported separately. See our Form 1099-B Reporting guide to understand how brokers report capital gains and transactions to the IRS.

Box 2a is where your total capital gain distributions should be reported, and Box 3 shows non-dividend distributions. Box 4 should outline any taxes you paid to foreign countries, which should help you also determine if you qualify for a foreign tax credit.

You’ll use all the information on Form 1099-DIV to fill out Form 1040. Report qualified dividends from Box 1b on Schedule B and Form 1040, following the 2025 Form 1040 instructions. Also, report all of your total ordinary dividends on Form 1040 Line 3b. You may additionally need Schedule B if your total ordinary dividends exceed $1,500 and Schedule D if it’s required for your capital gains distributions.

Next Step: Do you still need more guidance? Check out our reporting stock sales page for a more detailed guide on how to effectively fill out different tax forms.

Foreign Dividend Considerations

If you receive investment income from a foreign dividend distribution, then those earnings are typically subject to withholding tax in the country from which they are paid out. Since U.S. citizens must report global income and are taxed on foreign earnings, such as dividend distributions, this creates a potential double-taxation situation.

Some tax treaties may reduce foreign withholding tax, but treaty benefits depend on the specific country and whether the payer qualifies under IRS rules. To claim lower U.S tax rates, the investor must have held the stock for more than 60 days during the 121-day period surrounding the dividend date.

Keep in mind that all foreign dividend distributions must be converted into U.S. dollars for reporting purposes, so you’ll need to use the exchange rate based on the date the payment was received to convert your currency.

Source: IRS Pub. 514

So What?: Foreign dividend distributions are complicated, and making sure you are compliant with all the national and international tax laws should be a top concern. Without filing the right forms, you might wind up facing double taxation on some of your investment income. Avoid that type of scenario by staying informed.

Properly Reporting and Paying Distributions and Dividend Taxes

When investors receive dividends or other distributions, it is considered a taxable event. Properly reporting those dividends and paying the correct tax rate can be complex, but hopefully this guide has helped you simplify the process.

First, determine whether the dividend is ordinary or qualified. Next, report the dividend distributions on IRS Form 1099-DIV and Form 1040 in either Box1a or Box 1b. If your total ordinary dividends exceed $1,500, then you also need to use Schedule B to fully list out your dividend distributions.

Are you looking to maximize your tax return this year and ensure your future investments are strategic? Consider downloading our First-Time Investor Tax Guide to get a full overview of how to set up a successful year of investing. You should also check out the rest of our website to learn plenty more about how your investments could impact your tax situation.

This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws and dollar thresholds referenced are current as of the last reviewed date shown above and may change. For guidance on your specific situation, consult a qualified tax professional.