US Dividend Tax Rates: Qualified, Ordinary, and the 3.8% NIIT

Dividends you receive in a taxable brokerage account face federal tax at one of two rate structures. Qualified dividends are taxed at 0%, 15%, or 20% based on your taxable income. Ordinary dividends are taxed at your regular income tax rate, which runs from 10% up to 37% for 2026. High earners may owe an additional 3.8% Net Investment Income Tax on top of either figure. Which rate applies to any given payment depends on the type of dividend, how long you held the stock, and where your total income lands for the year.

What Makes a Dividend Qualified

Every dividend starts as ordinary. It only earns the lower qualified rate if it clears two tests: a holding period test and a paying-corporation test.

The Holding Period

You must hold the stock for at least 61 days during the 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the first trading day on which a new buyer would not receive the upcoming dividend. Count the day you sold but not the day you bought, and skip any days where you reduced your risk of loss through a short position, put option, or similar hedge on the same shares.¹

Preferred stock with dividends tied to periods longer than 366 days uses a stricter test: 91 days during a 181-day window beginning 90 days before the ex-dividend date.¹

The Paying Corporation

The dividend has to come from a U.S. corporation or a qualified foreign corporation. A foreign corporation qualifies if its stock trades on an established U.S. securities market, if it is incorporated in a U.S. possession, or if it is eligible for benefits under a comprehensive U.S. tax treaty that includes an information-sharing program.² Passive foreign investment companies never qualify, even if their stock trades in the United States.

Distributions That Are Always Ordinary

Some payments never qualify no matter how long you hold. Distributions from money market accounts, most real estate investment trusts, employee stock ownership plans, and tax-exempt organizations are taxed as ordinary income.³ So are substitute payments or payments in lieu of dividends: if your broker lent your shares out of a margin account and a short seller paid you the equivalent of the dividend, that payment gets reported on Form 1099-MISC rather than Form 1099-DIV and can be taxed at rates up to 37%. Holding shares in a cash account prevents this.

2026 Rates for Qualified Dividends

Qualified dividends use the same preferential rates that apply to long-term capital gains. For 2026:

0% rate: taxable income up to $49,450 for single filers, or $98,900 for married couples filing jointly.
15% rate: taxable income from $49,451 to $545,500 for single filers, or $98,901 to $613,700 for married couples filing jointly.
20% rate: taxable income above $545,500 for single filers, or above $613,700 for married couples filing jointly.

The 0% bracket is real. If your total taxable income including dividends stays below $49,450 as a single filer, your qualified dividends face zero federal tax. It is not a deduction or credit — the rate itself is zero.⁴

2026 Rates for Ordinary Dividends

Ordinary dividends are added to your wages, freelance income, interest, and other earnings and taxed at the graduated federal rates. For 2026, the top marginal rate is 37%, which starts above $640,600 for single filers and $768,700 for married couples filing jointly.⁵

The 3.8% Net Investment Income Tax

Higher earners face a second layer. The Net Investment Income Tax is a flat 3.8% surtax on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds a fixed threshold.⁶ The MAGI thresholds are $200,000 for single filers and $250,000 for married couples filing jointly, and they are not adjusted for inflation. They have stayed the same since the tax took effect in 2013.⁷

The NIIT stacks on top of whatever dividend rate already applies. A single filer well above $545,500 pays 20% on qualified dividends plus 3.8%, for a combined federal rate of 23.8%. On ordinary dividends at the top bracket, the worst-case combined rate is 40.8%. Net investment income includes dividends, interest, capital gains, rental income, royalties, and annuities.⁶

Reinvested Dividends Are Still Taxed

Enrolling in a dividend reinvestment plan does not defer or eliminate the tax. When your broker automatically reinvests dividends to buy more shares, the IRS treats it exactly as if you received cash and used it to buy stock. The dividend is taxable income in the year it was paid, whether or not the money ever hit your bank account.⁸

The upside: each reinvested dividend increases your cost basis in the stock. The new shares have a basis equal to the dividend amount you paid tax on, which reduces your capital gain when you eventually sell. Track those small purchases. Investors who forget them and use only their original purchase price as basis end up paying capital gains tax on income they already paid dividend tax on. If your plan lets you buy shares at a discount to fair market value, you must report the full fair market value of those shares as dividend income, not just the discounted amount you paid.⁸

Return of Capital Is Not a Dividend

Not every distribution is taxed as a dividend. When a company distributes more than its current and accumulated earnings and profits, the excess is a return of capital, reported in Box 3 of your Form 1099-DIV. A return of capital is not taxed when you receive it. Instead, it reduces your cost basis in the stock.⁹

Lower basis means a larger capital gain when you sell. Once your basis reaches zero, any further return of capital distributions are taxed immediately as capital gains, long-term or short-term depending on how long you have held the shares. REITs, master limited partnerships, and some closed-end funds commonly make return of capital distributions, so basis tracking matters more with those securities.⁹

Foreign Dividends

Dividends from foreign companies are fully subject to U.S. income tax. Many foreign countries also withhold tax before the dividend reaches your account, creating potential double taxation on the same income. The main relief is the Foreign Tax Credit, claimed on Form 1116, which lets you subtract qualifying foreign taxes paid from your U.S. tax bill. The credit is capped at the U.S. tax you would have owed on the foreign income, so foreign taxes cannot be used to offset U.S. tax on domestic investments.¹⁰

Foreign dividends can still qualify for the preferential 0%, 15%, or 20% rates if the paying corporation passes the qualified foreign corporation test. Tax treaties often reduce the withholding rate the foreign country can impose on dividends paid to U.S. investors, though the specific rate varies by treaty.¹⁰

Dividends Inside Retirement Accounts Follow Different Rules

The rates above apply to dividends in a taxable brokerage account. Dividends earned inside a Traditional IRA or 401(k) are not taxed when received; the whole distribution is later taxed as ordinary income at withdrawal, regardless of whether it originated as a qualified dividend. Dividends inside a Roth IRA or Roth 401(k) come out tax-free if you meet the qualified distribution rules. Inside an HSA, investment growth including dividends is tax-free, and withdrawals for qualified medical expenses are never taxed.

Reporting and Paying the Tax

Your broker reports all dividends paid during the year on Form 1099-DIV, which you should receive by mid-February. Box 1a shows total ordinary dividends, which includes the qualified portion. Box 1b shows the qualified portion by itself. Box 3 shows nondividend distributions (return of capital). You transfer ordinary dividends to line 3b of Form 1040 and qualified dividends to line 3a.¹¹ If your total ordinary dividends exceed $1,500, you also file Schedule B, which itemizes each source of dividend and interest income.¹²

Dividends do not come with automatic withholding. If dividend income pushes you into owing $1,000 or more at tax time, you may need to make quarterly estimated tax payments to avoid an underpayment penalty.¹³ The safe harbor is to pay at least 90% of your current-year tax liability, or 100% of last year’s tax (110% if your AGI exceeded $150,000), through withholding and estimated payments combined. Some brokers will withhold federal tax directly from dividend payments on request, though not all offer this for taxable accounts.

State Tax on Dividends

Federal tax is not the whole picture. Most states with an income tax treat dividends as taxable income and do not offer a preferential rate for qualified dividends: your state adds dividends to your other income and taxes the total at its standard rates. Eight states levy no individual income tax at all. A handful of others offer partial exclusions or credits for investment income. In high-tax states, the combined effective rate on ordinary dividends can exceed 50%.

1
Internal Revenue Service. Instructions for Form 1099-DIV
2
Legal Information Institute. 26 USC 1(h)(11) – Definition: Qualified Foreign Corporation
3
Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions
4
Internal Revenue Service. Revenue Procedure 2025-32
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. Net Investment Income Tax
7
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
8
Internal Revenue Service. Stocks (Options, Splits, Traders) 2
9
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
10
Internal Revenue Service. About the Foreign Tax Credit
11
Internal Revenue Service. 1099-DIV Dividend Income
12
Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
13
Internal Revenue Service. Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty