Is Dividend Income Taxable?

In most cases, dividend income is taxable. Taxpayers will often receive a Form 1099-DIV for all dividends in excess of $10 or more earned from any single entity. In addition, taxpayers must report this income on Schedule B of their Federal tax return if they've received over $1,500. Qualified dividends are also subject to their own tax table which topped out at 20% for 2022.

Some investment vehicles that issue dividends are exempt from taxes, as some mutual funds or other regulated investments may hold municipal or tax-exempt securities that yield nontaxable dividends. In addition, the lowest tier for the qualified dividend tax table assesses a 0% tax on individuals with lower income.

A qualified dividend is taxed at the lower long-term capital gains tax rate instead of at the higher tax rate used on an individual’s regular income. To be eligible for this special tax rate, a dividend must be paid by one of the following:

• A U.S. company
• A company in U.S. possession
• A foreign company residing in a country that is eligible for benefits under a U.S. tax treaty
• A foreign company’s stock that can be easily traded on a major U.S. stock market

These dividends must also meet holding period requirements. The stock must have been held in excess of 60 days during the 121-day period beginning 60 days before the ex-dividend date. In the case of preferred stock, the stock must have been held in excess of 90 days during the 181-day period beginning 90 days before the ex-dividend date if the dividends are due in a period of time longer than 366 days.

Qualified Dividend Taxes

The amount of tax paid on qualified dividends depends on the taxpayer's filing status and taxable income. Below certain threshold, qualified dividend income is tax-free, and qualified dividend income is assessed at the highest 20% rate to those who exceed the highest income thresholds below.

The breakdown of taxes on qualified dividends for 2022 and 2023 is below. The figures are calculated using the Qualified Dividends and Capital Gain Tax Worksheet contained within the instructions for Form 1040 in addition to inflation-adjusted wage brackets for 2023.

Meanwhile, there are nonqualified, or ordinary, dividends. These dividends do not meet the qualified dividend requirements and are treated as short-term capital gains. These nonqualified dividends are taxed at the same rates as an individual's regular income. Thus, in the chart above, nonqualified dividends are taxed at the "Tax Rate on Regular Income."

The Bottom Line

Many investors seek additional cash flow by investing in dividend-issuing securities. Some securities are tax-exempt, while other types of dividends held within certain retirement accounts is non-taxable. However, qualified dividends are taxed at a rate based on a taxpayer's marginal income rates. Qualified dividends can be taxed at a rate up to 20%, and a taxpayer may need to fill out additional tax schedules to support the income.