Is There a Dividend Tax? Your Guide to the Dividend Stocks Tax Rate

We'll cut to the chase: Yes, you must pay taxes on dividend income. When you earn money on your investments or have realized gains, it’s a taxable event.

Before we launch into the details of things like dividend stocks tax rate, capital gain distributions and more, let’s square away the definition of “dividend.” A dividend is a distribution paid on a regular basis to individual investors that own shares of stock. Usually, companies pay out cash dividends on a per-share basis, but sometimes companies also pay out shares of stock as dividends. It’s important to keep an eye on the ex-dividend date to know when you qualify for a dividend payout from a specific company during a particular tax year.

Dividends are one of the easiest, most passive ways to earn money. Let’s walk through the tax ramifications of paying dividends in this article, including the dividend tax rates for 2022, the difference between qualified and nonqualified dividends, how to report them on your taxes and how to control your dividend tax bill.

Are Dividends Taxed?

If a company pays you over $10 per year in dividends, they will have to report it using IRS Form 1099-DIV, which is sent to both the IRS and to you.

For tax purposes, dividend stocks are generally treated as income. Unless you hold your income in a tax-deferred account like an IRA or 401(k), you'll include dividends as gross income during the year that you receive them.

However, before you get discouraged about having to pay taxes on dividend payments, it’s important to remember that certain types of dividends qualify for favorable tax treatment. It’s in your best interest to consider this type of favorable treatment so you don’t have to pay the same tax rate as you’d receive for ordinary income. We'll discuss more about this in the next section.

Note: You must pay dividends even if you reinvest your money into the corporation — in other words, if you buy more stock with your dividend payments, you'll still have to pay dividends.

What Are Qualified Dividends and Nonqualified Dividends?

There are two types of dividends: qualified dividends and nonqualified dividends.

Qualified dividends must come from a U.S. corporation or a qualifying foreign entity. Tax rates are based on the capital gains tax rates, which are based on a 0%, 15% or 20% tax rate. The tax rate depends on your filing status.

Ordinary dividends, also called nonqualified dividends, offer worse tax treatment in comparison to qualified dividends. Ordinary dividends are taxed based on your federal income tax bracket. you can have a tax rate up to 37%, depending on your tax bracket.

Dividend Tax Rates for 2022

Taxpayers will pay the following dividend tax rates for qualified dividends for single filers, head of household filers, those married filing jointly as well as married filing separately. 

Qualified Dividend Tax Rate for Single Filers	2022 Taxable Income Range
0%	$0 to $41,675
15%	$41,676 to $459,750
20%	$445,851 and up

Qualified Dividend Tax Rate for Head of Household Filers	2022 Taxable Income Range
0%	$0 to $55,800
15%	$55,801 to $488,500
20%	$488,501 and up

Qualified Dividend Tax Rate for Married, Filing Jointly Filers	2022 Taxable Income Range
0%	$0 to $83,350
15%	$83,351 to $517,200
20%	$517,201 and up

Qualified Dividend Tax Rate for Married, Filing Separately Filers	2022 Taxable Income Range
0%	$0 to $41,675
15%	$41,676 to $258,600
20%	$258,601 and up

According to the IRS, the federal income tax rates and tax brackets for 2022 are as follows for ordinary dividends: 

Ordinary Dividend Tax Rate for Single Filers	Taxable Income Bracket
10%	$0 to $9,950
12%	$9,951 to $40,525
22%	$40,526 to $86,375
24%	$86,376 to $164,925
32%	$164,926 to $209,425
35%	$209,426 to $523,600
37%	$523,601 or more

Ordinary Dividend Tax Rate for Married, Filing Jointly Filers	Taxable Income Bracket
10%	$0 to $19,900
12%	$19,901 to $81,050
22%	$81,051 to $172,750
24%	$172,751 to $329,850
32%	$329,851 to $418,850
35%	$418,851 to $628,300
37%	$628,301 or more

Ordinary Dividend Tax Rate for Married, Filing Separately Filers	Taxable Income Bracket
10%	$0 to $9,950
12%	$9,951 to $40,525
22%	$40,526 to $86,375
24%	$86,376 to $164,925
32%	$164,926 to $209,425
35%	$209,426 to $314,150
37%	$314,151 or more

Ordinary Dividend Tax Rate for Head of Household Filers	Taxable Income Bracket
10%	$0 to $14,200
12%	$14,201 to $54,200
22%	$54,201 to $86,350
24%	$86,351 to $164,900
32%	$164,901 to $209,400
35%	$209,401 to $523,600
37%	$523,601 or more

How to Report Dividend Income on Your Taxes

As mentioned earlier, you’ll receive Form 1099-DIV by mutual fund companies, brokers and corporations when you receive $10 or more in dividend income. Specifically, you’ll see ordinary dividends in Box 1a, qualified dividends in Box 1b — these qualify for the preferred capital gains tax rate and non-dividend distributions in Box 3.

To report dividend income, you report ordinary dividends on Line 3b of your Form 1040 and qualified dividends on Line 3a of the same form.

You must report dividend income on your tax return even if for some reason your brokerage doesn’t send you a Form 1099-DIV.

You may need to use Schedule B, a supplemental tax form used to list interest and dividend income from multiple sources. It’s required if you have $1,500 in interest income and dividends.

How to Determine if You Owe Tax on Stock Dividends

How do you know if you owe tax on your stock dividends? It’s a great question, and if you’re still not sure, a tax professional can help you make that determination. However, you can consider:

• Your tax bracket: Your tax bracket helps determine your tax rate. If you have taxable earnings and you’re in one of the lowest federal income tax brackets, you won’t have to pay dividends. Furthermore, if you find yourself in a situation where you received a nontaxable dividend, you also may not have to pay taxes on your dividends.
• Your investment account type: If you have a taxable brokerage account, chances are, you’ll pay tax on your dividends unless you own certain types of accounts such as a Roth IRA, 401(k), 529 plan or Coverdell ESA. However, it’s a good idea to talk to your tax advisor if you have to pay taxes on situations where you own a retirement account and specific entities such as a master limited partnership.
• Dividend type: What type of dividends do you have? You might be able to opt out of paying taxes if you have a nontaxable distribution like a return of capital situation.

How to Control Your Dividend Tax Bill

How can you skirt dividend taxes during a particular calendar year and beyond? Let’s take a look at a few tactics you can implement in order to control your dividend tax bill, but talking with a tax professional about your investment income is always a good idea.

Earn More Qualified Dividends

As we’ve already outlined, qualified dividends offer advantages because you can take advantage of the long-term capital gains tax rate at only 0%, 15%, and 20% tax brackets compared to the higher federal income tax rates that could be as high as 37%. 

However, it’s important to know what “qualifies” as a qualified dividend. You must hold the stock in your portfolio for more than 60 days during a 121-day period which must begin 60 days before the ex-dividend date.  

Consider Tax-Loss Harvesting

You can get around paying dividend taxes if you strategically sell an existing holding for a loss in order to offset any gains you’ve received. In other words, if Stock A has suffered losses but you’ve been benefiting from dividends from Stock B, you’ll reduce any realized gains.

However, it’s important to know that you can’t sell and buy the same stock within 30 days.

Consider Using a Retirement Account

One of the most common ways to get around avoiding paying capital gains or paying taxes on dividends is to put your money into a retirement account. A Roth IRA serves as a great tax shelter option because you don’t have to pay taxes as long as you leave the money in for a specific amount of time. In accordance with the Roth IRA five-year rule, you cannot withdraw earnings tax free until it has been five years since you first contributed to a Roth IRA account. However, you will pay taxes if you violate the rules attached to Roth IRA withdrawals.

Learn more about dividend stocks for retirement.

Bottom Line

Unfortunately, you don't get a "get out of taxes" pass when you invest in dividend-paying stocks, even if you reinvest those dividends. Even so, making money in your sleep through dividends can have major benefits, so continue learning more about why you should buy dividend stocks.