Qualified dividends are taxed at the same low rates as long-term capital gains, while ordinary dividends are taxed at the regular rates that apply to wages and interest. Which one you get depends on who paid the dividend and how long you held the shares around the ex-dividend date. This page compares the two, with a worked example on $5,000; for the wider asset class, see the stocks hub.
What is the difference between qualified and ordinary dividends?
Qualified dividends get the 0%, 15% or 20% long-term capital gains rates, while ordinary dividends are taxed at regular income tax rates of 10% to 37%.
One wrinkle: IRS Topic 404 calls all taxable dividends ordinary and treats qualified dividends as the part of that total taxed at the lower rates. On this page, ordinary means the nonqualified remainder.
| Qualified dividends | Ordinary (nonqualified) dividends | |
|---|---|---|
| Federal rate in 2026 | 0%, 15% or 20%, set by taxable income | 10% to 37%, the regular brackets |
| Typical payers | US companies and qualifying foreign companies | REITs, money market and bond funds, some foreign companies |
| Holding period | More than 60 days in a 121-day window | None needed |
| Form 1099-DIV | Box 1b, also counted in box 1a | Box 1a minus box 1b |
| 3.8% net investment income tax | Applies above the income thresholds | Applies above the income thresholds |
What is the holding period for qualified dividends?
You need more than 60 days of ownership within a 121-day window that opens 60 days before the ex-dividend date.
IRS Publication 550 adds three counting rules. Count the day you sold the shares but not the day you bought them; for shares bought on an exchange, the holding period starts the day after the trade date. Preferred stock whose dividends cover periods totaling more than 366 days needs more than 90 days in a 181-day window that starts 90 days before the ex-dividend date. And days do not count while your risk of loss was reduced, for example while you held a put option on the stock, were under contract to sell it, had an open short sale of the same stock, or had sold someone an option to buy it.
Worked example: Holding Microsoft through its November 2026 dividend
Microsoft's $0.98 quarterly dividend goes ex on Thursday, November 19, 2026, so the 121-day window runs from Sunday, September 20, 2026, through Monday, January 18, 2027.
- Buy on Wednesday, November 18, the last trading day that still earns the dividend. Your holding period starts on Thursday, November 19.
- Sell on Friday, January 15, 2027, and you have held for 58 days in the window: 12 in November, 31 in December and 15 in January. The $0.98 is an ordinary dividend.
- Day 61 is Monday, January 18, but the NYSE is closed for Martin Luther King Jr. Day, so the first trading day that keeps the dividend qualified is Tuesday, January 19, 2027.
- An investor who already owned the shares on September 20 reaches 61 days in the window on November 19 and could sell as early as the ex-dividend date itself.
The test only bites on short holdings around a payment; how dividend dates work covers the trading side, and Microsoft's stock page has its price history.
Which dividends are qualified and which are not?
Dividends from US corporations and qualified foreign corporations can be qualified, while payouts that are really interest, fund capital gains or partnership income cannot.
| Payment | Usual federal treatment |
|---|---|
| Dividends on stock of a US company, holding period met | Qualified |
| Dividends from a company in a US territory, covered by a qualifying US tax treaty, or with stock or ADRs traded on a US exchange | Qualified, unless it is a passive foreign investment company |
| Stock fund and ETF dividends | Qualified only to the extent the fund itself received qualified dividends; the fund reports the split |
| REIT dividends | Mostly ordinary; a smaller part may be qualified or a capital gain distribution |
| Money market fund dividends | Ordinary, because the fund's income is interest |
| Credit union and savings bank 'dividends' on deposits | Interest, not dividends |
| Fund capital gain distributions | Long-term capital gains, not dividends |
| Dividends from tax-exempt organizations and farmers' cooperatives | Not qualified |
For foreign companies, Publication 550 lists the treaty countries that count; foreign tax withheld appears in box 7 of Form 1099-DIV and can usually be claimed as a credit or deduction.
How are REIT, MLP and money market fund payouts taxed?
REIT dividends are mostly ordinary income, money market fund dividends are ordinary, and MLP distributions are partnership payouts reported on Schedule K-1 rather than dividends.
REITs. According to Investor.gov, most real estate investment trusts distribute at least 100% of taxable income to shareholders, and those dividends are generally taxed as ordinary income. Two features soften that. Part of a payout may be a capital gain distribution or a return of capital, which lowers your cost basis instead of being taxed now. And ordinary REIT dividends in box 5 qualify for the 20% qualified business income deduction under section 199A, which the IRS says continues for tax years beginning after 2025, if you held the shares more than 45 days in the 91-day window starting 45 days before the ex-dividend date. At the 37% bracket that cuts the effective rate to 29.6%, before the 3.8% surtax.
MLPs. Master limited partnerships are taxed as partnerships. The SEC's investor bulletin explains that each unitholder reports a share of the MLP's income, gains, losses and deductions from a Schedule K-1, owes tax even in a year with no cash distribution, and may have to file returns in states where the MLP operates. The cash itself is not a dividend: under IRS Publication 541, a partnership distribution reduces your basis and is taxed only once it exceeds that basis. Qualified publicly traded partnership income also gets the 20% deduction, and the SEC tells investors to check the IRS rules on unrelated business taxable income with a tax adviser before buying.
Money market funds. Their payouts are reported as dividends in box 1a, but the fund earns interest, so there is little or no qualified income to pass on. How money market funds work covers the funds, and whether T-bills are taxable covers Treasury interest.
How much tax do you pay on $5,000 of dividends?
In 2026, $5,000 of qualified dividends costs $0, $750 or $1,000 in federal income tax, while ordinary dividends cost $500 to $1,850, before any 3.8% surtax.
Those figures assume all $5,000 falls in one bracket. For 2026, qualified dividends are taxed at 0% up to $49,450 of taxable income (single) or $98,900 (married filing jointly); 15% above that; 20% above $545,500 (single) or $613,700 (joint). Ordinary dividends stack on top of your other income in the regular brackets, which the IRS published in October 2025:
| Rate | Single filers | Married filing jointly |
|---|---|---|
| 10% | Up to $12,400 | Up to $24,800 |
| 12% | Over $12,400 | Over $24,800 |
| 22% | Over $50,400 | Over $100,800 |
| 24% | Over $105,700 | Over $211,400 |
| 32% | Over $201,775 | Over $403,550 |
| 35% | Over $256,225 | Over $512,450 |
| 37% | Over $640,600 | Over $768,700 |
Both kinds of dividend also count toward the net investment income tax: 3.8% on the smaller of net investment income and the amount by which modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). When modified AGI clears the threshold by more than your investment income, all of that income is taxed; when it clears it by less, only the excess is.
Worked example: The same $5,000 of dividends at two income levels
A single filer has $40,000 of taxable income before dividends, and a married couple filing jointly has $300,000. Neither has other investment income. The couple's modified adjusted gross income is well above $250,000, so the surtax applies to all $5,000; the single filer's is far below $200,000.
| Single filer, $40,000 | Married couple, $300,000 | |
|---|---|---|
| Taxable income including the dividends | $45,000 | $305,000 |
| Regular bracket the dividends fall in | 12% | 24% |
| Rate if the dividends are qualified | 0% | 15% |
| Income tax if qualified | $0 | $750 |
| Income tax if ordinary | $600 | $1,200 |
| Net investment income tax at 3.8% | $0 | $190 |
| Total if qualified | $0 | $940 |
| Total if ordinary | $600 | $1,390 |
| Saved by qualified status | $600 | $450 |
The single filer's $45,000 stays inside the 0% band, so qualified dividends cost nothing, while the same $5,000 failing the holding period would cost $600. The couple saves the 9-point gap between 24% and 15%; the $190 surtax is the same either way.
One quirk: just above the top of the 0% band, up to $50,400 of taxable income for single filers or $100,800 for joint filers, the 15% qualified rate exceeds the 12% bracket. The Qualified Dividends and Capital Gain Tax Worksheet in the 2025 Form 1040 instructions takes the smaller of two tax calculations, so qualified status never raises your total tax.
How do you read boxes 1a and 1b on Form 1099-DIV?
Box 1a shows all your ordinary dividends, qualified ones included, and box 1b shows the qualified part, so the nonqualified amount is box 1a minus box 1b.
Payers send the form once dividends and other distributions reach $10 for the year, but you must report all dividend income even without one, including dividends reinvested through a dividend reinvestment plan. Box 1b goes on line 3a of Form 1040 and box 1a on line 3b; do not add them together, because box 1b is already inside box 1a.
| Box | What it shows |
|---|---|
| 1a Total ordinary dividends | Every taxable dividend, including money market fund dividends, short-term gains paid out by funds and reinvested dividends |
| 1b Qualified dividends | The part of box 1a eligible for the 0%, 15% and 20% rates |
| 2a Total capital gain distributions | Long-term gains paid out by funds and REITs, taxed at capital gains rates |
| 3 Nondividend distributions | Return of capital: not taxed when paid, but it lowers your cost basis |
| 5 Section 199A dividends | REIT dividends eligible for the 20% deduction |
| 12 Exempt-interest dividends | Tax-exempt interest passed through by municipal bond funds |
Box 1b is the payer's figure, not the final answer: the 1099-DIV instructions let payers include dividends there when checking your holding period is impractical, and Publication 550 says dividends that fail the test are not qualified even if box 1b shows them. Once ordinary dividends pass $1,500, you also file Schedule B.
Does the qualified label matter in an IRA or 401(k)?
No, not while the money stays inside: dividends earned within an IRA or 401(k) go untaxed when paid, and generally no Form 1099-DIV is issued for them.
Withdrawals are what count. Publication 590-B says traditional IRA distributions are taxed as ordinary income, apart from nondeductible contributions, so a dividend that would have been qualified in a brokerage account comes out taxed at regular rates; qualified Roth distributions are not taxed at all. Roth vs traditional IRA covers the trade-offs, and capital gains tax on stocks covers selling shares in a regular account.
What are the risks of getting dividend taxes wrong?
The main risks are counting a dividend as qualified when the holding period failed, missing state tax, and relying on rules that Congress or the IRS later changes.
- Hedging away the holding period. Days covered by a put, a short sale of the same stock or a call you sold do not count, even on shares owned for years.
- Lent shares. Shares lent out of a margin account can produce payments in lieu of dividends, reported on Form 1099-MISC and taxed at ordinary rates; margin accounts explained covers share lending.
- State tax. States set their own rules. California's Franchise Tax Board says the state has no lower rate for qualified dividends and taxes all dividends as ordinary income.
- Underpayment. IRS Topic 404 warns that significant dividend income may require estimated tax payments to avoid a penalty.
- Living abroad. Nonresident investors sit outside this system and face withholding instead: 30% on US-source dividends, unless a tax treaty sets a lower rate. US dividend withholding tax by country lists the treaty rates.
Thresholds move with inflation every year, and Congress sets the rates. Check the current IRS figures, and consider a tax professional if you hold MLPs, foreign stocks or hedged positions. For what dividends are worth before tax, see dividend investing basics.