You know dividends get taxed, but the important question is, how? According to the IRS, qualified dividends get taxed at the long-term capital gains rate, which is either 0%, 15%, or 20%.
Ordinary dividends, on the other hand, are taxed as regular income, and that can be anywhere from 10% to 37%.1
For someone in the 22% or 24% bracket, that gap is real money, we’re talking thousands of dollars on the exact same payment.
Qualified Dividends: Overview
What Makes a Dividend ‘Qualified’
To qualify for the special tax break, a dividend has to meet three specific IRS requirements.
- The dividend must be paid by a U.S. company or a qualified foreign corporation.
- You must meet the required holding period (generally more than 60 days within the 121-day period around the ex-dividend date).
- The dividend can’t come from certain investments like REITs or other non-qualifying entities.
- Your position can’t be hedged using options or other derivatives (for example, using certain options strategies that reduce your risk of loss).
All of those criteria have to be met. If any one of them is missed out, then the dividend is taxed as an ordinary dividend, and you have to pay the higher rate taxed on top of your ordinary income.
The Holding Period Rule
This often catches investors off guard. The holding period requires that you’ve held the shares for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date. And this date is the cutoff that the company sets to determine who’s eligible for the dividend.
If you buy before the date and hold it long enough, you qualify for the lower rate. But if you buy right before and sell right after, you won’t qualify.
The same rules apply at the fund level, it’s the fund’s ex-dividend date that determines whether the dividend is qualified or non-qualified.
For preferred stock, the rules are a bit stricter. You need to hold the shares for 90 days in an 181-day period when you’re covering periods over 366 days.2
Qualifying Foreign Corporations
Dividends from foreign companies aren’t automatically disqualified. They do need to be based in a country with a U.S. tax treaty or trading on a major U.S. stock exchange to qualify.
Note that not every foreign corporation qualifies; it has to be established before the tax break applies. Payouts from these foreign corporations still have to meet the holding period to qualify for the preferential rate.
This is a big deal for anyone holding international ETFs or ADRs in a taxable brokerage account. Check your Form 1099-DIV to see how each holding reported its dividends, and whether they were qualified or not.
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Ordinary Dividends: Overview
What Investments Produce Non-Qualified Dividends
Some types of investments nearly always generate non-qualified dividends, regardless of how long you’ve held them.
Real Estate Investment Trusts or REITs, are a common example. Because they’re a pass-through entity, the dividends you get from them are usually not considered qualified, and you’ll pay ordinary income tax on them.
Money market funds (unless municipal) also don’t qualify because their payouts are reported as interest income.
Then there’s credit unions, which technically pay “dividends” on your savings account, but those are just interest income, and you’ll pay ordinary rates on them.
Dividends from certain foreign companies that don’t meet U.S. tax rules are also non-qualified and taxed at higher rates.
High-income producing ETFs that use options strategies, such as JEPI or JEPQ, also generate dividends that are generally not qualified, meaning they are taxed at ordinary income rates as well.
Because these payouts are taxed as regular income, they follow the ordinary income tax brackets. The table below outlines the 2026 ordinary income tax brackets that apply to nonqualified dividends.
Tax rate | Single | Married filing jointly | Married filing separately | Head of household |
10% | $0 to $12,400 | $0 to $24,800 | $0 to $17,700 | $0 to $12,400 |
12% | $12,401 to $50,400 | $24,801 to $100,800 | $17,701 to $67,450 | $12,401 to $50,400 |
22% | $50,401 to $105,700 | $100,801 to $211,400 | $67,451 to $105,700 | $50,401 to $105,700 |
24% | $105,701 to $201,775 | $211,401 to $403,550 | $105,701 to $201,750 | $105,701 to $201,775 |
32% | $201,776 to $256,225 | $403,551 to $512,450 | $201,751 to $256,200 | $201,776 to $256,225 |
35% | $256,226 to $640,600 | $512,451 to $768,700 | $256,201 to $640,600 | $256,226 to $384,350 |
37% | $640,601 or more | $768,701 or more | $640,601 or more | $384,351 or more |
Source: Internal Revenue Service, Revenue Procedure 2025-32. See our guide to the 2026 capital gains tax brackets.
Knowing this ahead of time can save you some headaches when it comes to doing your taxes.
Dividends & Capital Gains Taxation
Qualified Dividend Tax Rate by Taxable Income
Here’s what the qualified dividend tax rate looks like for the 2026 tax year.3
Tax rate | Single | Married filing jointly | Married filing separately | Head of household |
0% | $0 to $49,450 | $0 to $98,900 | $0 to $49,450 | $0 to $66,200 |
15% | $49,451 to $545,500 | $98,901 to $613,700 | $49,451 to $306,850 | $66,201 to $579,600 |
20% | $545,501 or more | $613,701 or more | $306,851 or more | $579,601 or more |
Source: Internal Revenue Service, Revenue Procedure 2025-32. See our guide to the 2026 capital gains tax brackets.
That 0% bracket is a good thing. If you have taxable income under that threshold, you don’t pay any federal tax on qualified dividends.
And that’s a big difference from non-qualified dividends, which get taxed at 10%, 12% or even higher. You can save yourself a pretty penny by taking advantage of that lower rate.
Not all funds are created equal. You can get two different funds paying the same amount of dividends per share, and have completely different outcomes on your tax return because one qualifies and the other doesn’t.
To see previous qualified dividend income percentages for select investments, each brokerage differs on how they display the data. Vanguard and Charles Schwab make it super easy through direct pages, where other like State Street you have to manually check their tax reports to calculate the percentage.
The Net Investment Income Tax (NIIT)
If you’re a high-income investor, you may have to pay an extra 3.8% on top of your taxes because of the net investment income tax (NIIT). This kicks in for individuals whose modified adjusted gross income is over $200,000 if they’re single, or $250,000 if they’re married and filing jointly.4
This applies to both qualified and ordinary dividends. For high earners receiving qualified dividends, it’s not as simple as just paying 20% – the NIIT factored in can bring that rate up to 23.8%. For ordinary dividends at the 37% top bracket, the effective tax liability blows up to 40.8%.
The difference in treatment between qualified and ordinary dividends doesn’t get any smaller for high earners. If you’re just knocking on the doors of those tax thresholds, then how you go about placing your dividend-paying investments across different account types becomes a lot more important.
And if you’re not sure where to start, then having a tax professional help you map out the right strategy is a good idea.
Dividend Income From Funds
When you own a fund, it’s going to collect dividends from the underlying holdings and pass that income on to the people who own shares in it.
The question of whether those dividends get more favorable tax treatment depends on a couple of key things; what the fund actually holds and whether the fund meets the IRS holding period requirement. Mutual funds and ETFs both pass through dividend income this way, but the tax outcome is going to be different each time, depending on what’s in the fund.
Most equity index funds that hold broad US stocks tend to generate a big portion of qualified dividends. For the most part this is because the fund holds shares in US corporations that pay regular dividends on common stock, which by default clears the payer requirement.
Where funds get a bit trickier is when they have a heavy REIT exposure or options strategies to generate an income; these tend to produce a lower percentage of dividends that qualify for the long-term capital gains tax rate.
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Reducing Dividend Taxes
Tax-Advantaged Accounts
The most obvious strategy is to place your dividend-generating holdings in the right accounts, or to put it more simply, placing them in tax-advantaged accounts where they’ll be tax-free until you take them out.
In a traditional IRA or 401(k), you’re just deferring the taxes until withdrawal, whereas in a Roth IRA, qualified withdrawals are completely tax-free. These tax-advantaged accounts are especially useful for holdings that would otherwise be generating dividends at your highest marginal tax rate.
Be sure to check out our guide to the best IRA accounts if you’re still figuring out where to put your investments.
Don’t Forget the Ex-Dividend Date
For people who are invested in taxable accounts, timing is particularly important. If you buy a stock or fund right before its ex-dividend date, you may end up getting a taxable dividend payment that you really weren’t planning on.
Every ex-dividend date is a chance to get it right: Own the shares before it and keep them long enough, and you’ll qualify for that lower tax rate.
For people who are long-term buy-and-hold investors, this usually doesn’t become a problem. However, for anyone who is rebalancing their portfolio at the end of the year, keeping an eye on the ex-dividend date can make all the difference between ending up in the lower capital gains bracket or being hit with ordinary income rates.5
Portfolio Implications
The tax treatment of your dividend income is shaping how and where you hold your investments, not just when you do your taxes.
For people who are generating a lot of dividend income and are near the NIIT threshold, it’s worth taking a long look at their taxable account holdings. The difference in how qualified dividends are taxed versus ordinary dividends can add up to a lot of money, especially if you’re near the top tax bracket.
Consulting a tax professional before making any big changes is likely a good idea.
For a broader look at the investment types that are creating the most tax drag, check out 5 investments to avoid in taxable accounts. With a better understanding of both tax drag and tax-efficient portfolio construction, you can get a more complete picture of what’s going on with your investments.
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