How Are Dividends Taxed? The 2026 Rules and a Worked Example

In the United States, dividends are taxed in the year you receive them, at one of two sets of rates. Qualified dividends are taxed at 0%, 15% or 20%. All other dividends are taxed at your regular income tax rate, which runs from 10% to 37%.

Which set applies depends on the kind of dividend. Which rate inside the set depends on your taxable income. Reinvesting the dividend changes nothing, and holding the shares in an IRA or a 401(k) changes everything.

This guide shows the 2026 rates, then works through the tax bill of one portfolio line by line. Figures were checked against IRS sources in October 2026.

The short version

Three things can be added on top:

• a 3.8% net investment income tax for higher incomes
• state income tax, in most states
• tax withheld by a foreign country, which you can usually get back as a credit

The 2026 tax rates

Qualified dividends

The rate depends on your taxable income, which is your income after the standard deduction or itemized deductions. These thresholds are for tax year 2026, from IRS Revenue Procedure 2025-32:

What makes a dividend qualified, including the holding period, is covered in qualified vs ordinary dividends.

Ordinary dividends

Dividends that are not qualified are added to your salary and other income and taxed at the same rates. These are the 2026 brackets published by the IRS:

The standard deduction for 2026 is $16,100 for a single filer and $32,200 for a married couple filing jointly.

The extra 3.8% for higher incomes

The net investment income tax adds 3.8% once your modified adjusted gross income passes $200,000 for a single filer or $250,000 for a married couple filing jointly. It applies to qualified and ordinary dividends alike. The thresholds are in IRS Topic 559, and they are not adjusted for inflation.

State tax

Most states tax dividends as regular income, with no lower rate for qualified dividends. A few states, such as Florida and Texas, have no income tax at all. This guide covers federal tax only.

A worked example: one portfolio, one tax bill

Take a single filer with a salary of $85,000 and a portfolio of about $150,000 in a regular brokerage account. In 2026 the portfolio pays $5,400 in dividends from four kinds of holdings.

Step 1: find the taxable income

The REIT deduction comes from a rule that lets you deduct 20% of qualified REIT dividends, whether or not you itemize. Only $720 of the $900 is taxed.

Step 2: tax each kind of dividend

Qualified dividends are stacked on top of the rest of your income. Here the other income already fills the space up to $70,120, which is above the $49,450 threshold, so all $4,000 of qualified dividends is taxed at 15%. The ordinary dividends fall in the 22% bracket.

Step 3: subtract the tax already paid abroad

Canada kept $120 before the dividend arrived. The US gives that back as a foreign tax credit, so the same income is not taxed twice.

This investor keeps $4,531.60. The overall rate is 16.1%, which is neither the 15% nor the 22% they might have expected. Because the foreign tax is under $300, the credit can be claimed directly on the return, without Form 1116. Foreign dividend withholding tax explains the rates by country and the limits of the credit.

The same portfolio at three incomes

The dividends are identical. Only the salary changes.

At a $45,000 salary, taxable income stays under $49,450, so the $4,000 of qualified dividends is tax-free. The US tax on the dividends is $146.40 before the credit. The $120 foreign tax credit, claimed under the $300 election, reduces it to $26.40, so most of what this investor pays is the $120 kept by Canada.

Are reinvested dividends taxable?

Yes. A reinvested dividend is taxed exactly like one paid in cash, in the year it is paid. IRS Publication 550 says so directly: "If you use your dividends to buy more stock at a price equal to its fair market value, you must still report the dividends as income."

This applies to a dividend reinvestment plan (DRIP) run by a company, to automatic reinvestment at your broker, and to a fund that reinvests its distributions for you. Your Form 1099-DIV shows the same amounts either way.

Two details are worth knowing:

• Each reinvestment is a new purchase. The shares bought have their own cost, which is the price paid, and their own holding period, which starts the day after the purchase. When you sell, that cost reduces your gain, so the dividend is not taxed a second time. Brokers track this for you, but check it if you ever transfer an account.
• A discount is income too. If a company's plan lets you buy shares below market price, Publication 550 has you report the full market value of the shares as dividend income.

The practical consequence: reinvesting leaves you with a tax bill and no cash to pay it. In the example above, a full reinvestment still costs $748.40 at tax time, from other money.

When the tax is paid

Dividends are taxed in the year they are paid to you, not the year they are declared. There is one exception, in Publication 550: a dividend that a fund or a REIT declares in October, November or December, to shareholders of record in one of those months, and pays in January counts for the year it was declared.

Nothing is withheld for US residents. Your broker pays you the full dividend. The exception is backup withholding at 24%, which applies when the broker does not have a correct taxpayer number for you.

You may need to pay during the year. According to IRS Topic 306, you avoid an underpayment penalty if you owe less than $1,000 at filing, or if your withholding and estimated payments cover at least 90% of this year's tax or 100% of last year's. If your adjusted gross income last year was above $150,000 ($75,000 if married filing separately), the second test is 110% of last year's tax. An investor with a salary can usually handle this by raising the withholding on their paycheck. Someone living on dividends pays estimated tax each quarter.

How dividends appear on Form 1099-DIV

Each broker or fund that paid you $10 or more sends a Form 1099-DIV. Dividends are taxable even below $10 or without a form. The boxes that matter:

Box 3 is often called a return of capital. Publication 550 explains that it "reduces the basis of your stock" and "is not taxed until your basis in the stock is fully recovered". You pay later, as a larger gain when you sell. Once your basis has reached zero, any further return of capital is taxed as a capital gain.

On the return, box 1a goes on line 3b of Form 1040 and box 1b on line 3a. If your ordinary dividends are over $1,500, IRS Topic 404 also requires Schedule B.

The account matters as much as the dividend

Everything above concerns a regular taxable account. Retirement accounts follow different rules:

Inside a retirement account, the difference between qualified and ordinary dividends disappears, and no Form 1099-DIV is issued. One cost remains: foreign tax withheld inside an IRA cannot be claimed as a credit. Dividends in retirement accounts covers this in detail.

If you are not a US taxpayer

The rules above are for US citizens and US tax residents, wherever they live. An investor who is neither does not file this way: the US withholds 30% of each dividend from a US company, or a lower treaty rate, often 15%, once a valid W-8BEN is on file with the broker. The investor's own country then taxes the dividend under its own rules. See foreign dividend withholding tax.

What this means for your portfolio

Your tax rate on dividends is a blend. As the example shows, a portfolio that mixes US shares, a REIT and a cash fund is taxed at several rates at once. The blended rate is the useful number for planning.

Compare yields after tax. A 6% yield taxed at 22% leaves 4.68%. A 5% yield taxed at 15% leaves 4.25%. The gap between two holdings is often smaller than it looks before tax. Your real dividend income after taxes walks through the calculation.

Put the heavily taxed payers where tax does not reach. REITs and bond funds lose the most in a taxable account and nothing in an IRA.

In OnlyDividends you set one tax rate per portfolio. A taxable portfolio can use your blended rate, 16% in the example, and an IRA portfolio 0%, so the income you see is the income you keep.

Frequently asked questions

How much tax do I pay on dividends?

Qualified dividends are taxed at 0%, 15% or 20% depending on your taxable income. Other dividends are taxed at your regular income tax rate, from 10% to 37%. Incomes above $200,000 for a single filer or $250,000 for a married couple pay a further 3.8%.

How much dividend income is tax-free?

For 2026, qualified dividends are taxed at 0% as long as your taxable income, including the dividends, stays under $49,450 for a single filer or $98,900 for a married couple filing jointly. Dividends inside a Roth IRA are not taxed either, as long as withdrawals follow the Roth rules.

Are reinvested dividends taxable?

Yes. A reinvested dividend is taxed like a cash dividend, in the year it is paid. The amount reinvested becomes the cost of the new shares, which lowers your gain when you sell.

Do I pay tax on dividends if I do not sell the shares?

Yes. The tax is on the dividend itself, not on a sale. Selling the shares is a separate event, taxed as a capital gain or loss.

Is tax taken out of dividends automatically?

Not for US residents. Your broker pays the full dividend and you settle the tax on your return or through estimated payments. Foreign countries do withhold tax on their companies' dividends, and the US withholds from investors who live abroad.

Do I have to report dividends under $10?

Yes. A broker does not have to send a Form 1099-DIV below $10, but the dividend is still taxable income.

Are dividends taxed twice?

In a sense, yes. The company pays corporate tax on its profit, and you pay tax on the dividend paid out of what is left. The lower rate on qualified dividends exists to soften that. A foreign dividend is not taxed a third time: the foreign tax credit offsets what the other country withheld.

Are REIT dividends taxed differently?

Mostly, yes. Regular REIT dividends are ordinary income taxed at your income tax rate, but 20% of them can be deducted, so only 80% is taxed.

Disclaimer

This article is general information about US federal tax, not tax advice. Rates and thresholds are for tax year 2026 and change every year. State taxes are not covered. The example is simplified and your situation may differ; check with a qualified tax professional before you act.