The tax treatment of dividends in the U.S. depends on whether the Internal Revenue Code (IRC) classifies them as qualified dividends or ordinary dividends (also referred to as nonqualified dividends.) Qualified dividends are taxed at the same rates as the capital gains tax rate. These rates are lower than ordinary income tax rates.

The tax rates for 澳洲幸运5官方开奖结果体彩网:ordinary dividends (typically those that are paid out from most common or preferred stocks) are the same as standard federal income tax rates or 10% to 37% for the 2024 and 2025 tax years. Investors pay taxes on ordinary dividends at the same rates they pay on their regular income, such as salary or wages. Income-tax and capital gains rates change over time, but in recent years, the latter has been substantially lower than the former.

Qualified Dividends vs. Ordinary Dividends

A dividend is a portion of a company's earnings paid directly to shareholders. Companies that offer dividends pay a fixed amount per share and can adjust it up or down with each earnings period (usually a calendar quarter) based on how the company is doing.

The investor must pay taxes on their ꦛdividends, but how much they pay depends on whether the dividends are qualified or ordinary.

Qualified dividends, which receive more favorable tax treatment, must meet a few criteria. They must be issued by U.S. corporations publicly traded on major exchanges, such as the Dow Jones or Nasdaq.

The investor must own them for 澳洲幸运5官方开奖结果体彩网:at least 60 days out of a 121-day holding period. Certain dividends, such as those derived from an 澳洲幸运5官方开奖结果体彩网:employee stock ownership plan or issued by a tax-exempt organization, are not eligible for qualified status.

There is no significant difference between qualified and ordinar𒀰y dividends apart from their tax treatment.

Qualified-Dividend Tax Treatment

Investors favor qualified dividends because they are subject to lower tax rates, namely those levied on long-term 澳洲幸运5官方开奖结果体彩网:capital gains rather than those charged on ordinary income.

That's true regardless of the investor's tax bracket, though the biggest savings accrue to investors in the top two brackets, where the tax rate difference between the two types of dividends can be as much as 20%.

The tax schedule for qualified dividends features only three levels: 0%, 15%, and 20%.

The 澳洲幸运5官方开奖结果体彩网:tax brackets are as follows:

Source: Internal Revenue Service

Source: Internal Revenue Service

Individuals who earn $200,000 or more, married couples filing separately who earn $125,000 or more, and married couples filing jointly who earn $250,000 more, pay an additional 3.8% on investment income, including qualified dividends.

Example of How Dividends Are Taxed

To see the difference these two tax treatments make, imagine an investor with 5,000 shares of Company X that generate $2 each in ordinary dividends, or $10,000 a year. Assume they are single and have a taxable income of $50,000 a year, which places them in the 22% marginal income rate bracket for ordinary income.

Since ordinary dividends receive no special tax treatment, they pay 22%, or $2,200, in taxes on their div🌱idends. However, if their di𒈔vidend is qualified, they pay a 15% rate, based on their income, or $1,500.

Imagine the same investor, still single, earns a taxable income of $1 million per year, excluding dividends from 50,000 shares of Company X stock. At $2 per share, their yearly dividend is $100,000. Taxed at the 37% top marginal rate, they owe $37,000 in federal taxes on the dividends if they're ordinary, but only $20,000 if they are qualified, a $17,000 savings.

The Bottom Line

Dividends can be a great way to earn an income stream from your investments, but, like all income, they are also taxed. Depend꧟ing on the type of dividend, qualified or nonqualified, you will be taxed at either your ordinary income tax bracket or the capital gains tax bracket, which is usually a lower tax rate.