Dividends are attractive to many investors because they provide a passive income and may increase the total returns from a stock portfolio. In the case of a recession, dividend-paying companies are the most attractive because they usually continue to pay dividends to their shareholders and the dividends tend to steadily grow over time. Therefore, you must know how dividends are taxed, so you know what to expect when filing your taxes.
What Is a Dividend?
It is a payment shareholders receive from a company’s earnings and profit. In other words, when you invest your money in a company, that company may pay you dividends as an incentive for holding its stock. Most dividends are paid in cash, but some are paid in the form of reinvestment in additional shares, which means that the money is used to buy you more shares of that company. Dividends are often distributed quarterly, but some are paid semiannually, or annually. Please note that not all companies pay dividends and a company can stop paying dividends at any time.
How are Dividend Taxed
Earned dividends are a type of income, so you have to pay taxes on them. For tax purposes, dividends are classified as qualified and nonqualified (also known as ordinary). Nonqualified dividends are taxed as ordinary income while qualified dividends that meet certain requirements are taxed at lower capital gain rates.
Qualified Dividends
These are the three requirements that classify a dividend as qualified.
• The dividends must have been paid by a U.S. corporation or a qualified foreign corporation.
• The IRS has determined it is a qualified dividend. For instance, some payouts are not considered qualified dividends by the IRS such as Capital gain distributions, and Dividends from a company that is a tax-exempt organization.
• You meet the holding period. This means that you owned the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date which is the day by when you must have owned the stock to receive the dividend.
For instance, if the ex-dividend date is August 11, 2023, the 121 period starts on June 12, 2023, and ends on October 10, 2023. This means that you must have held the stock for 60 days during that time.
When counting the days you held the stock, you must include the day you sold the stock, but not the day you purchased it.
Qualified dividends tax rates for 2022
| Tax Rate | 0% | 15% | 20% |
| Single | $0 to $41,675 | $41,676 to $459,750 | $459,751 or more |
| Married, Filing Separately | $0 to $41,675 | $41,676 to $258,600 | $258,601 or more |
| Head of Household | $0 to $55,800 | $55,801 to $488,500 | $488,501 or more |
| Married, Filing Jointly | $0 to $83,350 | $83,351 to $517,200 | $517,201 or more |
Qualified dividends tax rates for 2023
| Tax Rate | 0% | 15% | 20% |
| Single | $0 – $44,625 | $44,626 to $492,300 | $492,301 or more |
| Married, Filing Separately | $0 to $44,625 | $44,626 to $276,900 | $276,901 or more |
| Head of Household | $0 to $59,750 | $59,751 to $523,050 | $523,051 or more |
| Married, Filing Jointly | $0 to $89,250 | $89,251 to $553,850 | $553,851 or more |
Ordinary Dividends
These are the most common type of distribution from a corporation or a mutual fund and they are taxed like ordinary income. That is, at the investor’s usual marginal tax rate. You can check the table below to determine your 2022 tax bracket for your ordinary dividends.
Tax brackets for 2022
Rate | Single individual | Married filing separately | Married filing jointly | Head of the household |
| 10% | $10,275 or less | $10,275 or less | $20,550 or less | $14,650 or less |
| 12% | $10,275 to $41,775 | $10,276 to $41,775 | $20,551 to $83,550 | $14,651 to $55,900 |
| 22% | $41,776 to $89,075 | $41,776 to $89,075 | $83,551 to $178,150 | $55,901 to $89,050 |
| 24% | $89,076 to $170,050 | $89,076 to $170,050 | $178,151 to $340,100 | $89,051 to $170,050 |
| 32% | $170,051 to $215,950 | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $215,951 to $323,925 | $431,901 to $647,850 | $215,951 to $539,900 |
| 37% | Income over $539,900 | Over $323,925 | $647,850 | Over $539,900 |
You don’t need to determine for yourself which dividends are qualified and which are ordinary. Indeed, your financial institution such as your bank, brokerage, and any other dividend payers, will provide you with form 1099-INT with all that information. This form will include all the interest you received during the year and show which dividends are classified and which are ordinary. For instance, any ordinary dividends should be shown in box 1a while qualified dividends should be shown in box 1b.
Net investment income tax (NIIT).
You may also be subject to the NIIT. That is a 3.8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status.
NIIT Filing Status Threshold Amount
| Single | Married filing separately | Married filing jointly | Head of household | Qualifying Widow(er) with dependent child |
| $200,000 | $125,000 | $250,000 | $200,000 | $250,000 |
