Qualified vs Ordinary Dividends: What You Pay in 2026

A qualified dividend is an ordinary dividend that meets three IRS conditions and is taxed at the lower capital gains rates: 0%, 15% or 20%. A dividend that fails any of the three is taxed at your regular income tax rate, which runs from 10% to 37%.

On $1,000 of dividends, an investor in the 22% bracket pays $220 if the dividend is ordinary and $150 if it is qualified. Someone with a modest income can pay nothing at all.

This guide covers the 2026 rates, the three conditions, how to read your Form 1099-DIV, and the cases where a dividend your broker calls qualified is not. Figures were checked against IRS sources in October 2026.

The difference in one table

One point confuses many investors: the two are not separate piles. Box 1a is the total of your ordinary dividends, qualified or not. Capital gain distributions and returns of capital are reported in other boxes. Box 1b is the portion of that total that qualifies. The IRS instructions describe box 1b as "the portion of the dividends in box 1a that qualifies for the reduced capital gains rates".

Tax rates on qualified dividends for 2026

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

How the 0% rate works

Qualified dividends are stacked on top of your other income. The part that falls under the 0% threshold is tax-free. The part above it is taxed at 15%, or at 20% for the part above the upper threshold.

Take a single filer with $40,000 of taxable income from work and $15,000 of qualified dividends:

Had those dividends been ordinary, they would have been taxed at this filer's regular rates instead.

The extra 3.8% for higher incomes

A 3.8% net investment income tax applies on top 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 highest federal rate on a qualified dividend is therefore 23.8%. The thresholds are set out in IRS Topic 559.

State income tax comes on top of all of this. States that tax income generally treat both kinds of dividend the same way.

The three conditions for a qualified dividend

IRS Publication 550 applies the lower rate only if all three of these are met:

1. The dividend was paid by a US corporation or a qualified foreign corporation.
2. It is not on the IRS list of dividends that never qualify.
3. You held the stock long enough.

Condition 1: who paid it

Dividends from US corporations pass this test. A foreign company passes if any one of these is true:

• it is incorporated in a US territory
• it is eligible for the benefits of an income tax treaty that the US Treasury accepts for this purpose
• its shares, or its ADRs, are listed on a US national securities exchange or on Nasdaq

One exclusion applies in every case: a foreign company that is a passive foreign investment company (PFIC) in the year of the dividend or the year before does not qualify. Many foreign-domiciled funds fall in this category.

The treaty list in Publication 550 includes Canada, the United Kingdom, Switzerland, Germany, France, Japan and Australia, among more than 50 countries. Singapore and Hong Kong are not on it, so a company from there qualifies only if its shares or ADRs are listed in the US.

A foreign dividend can be qualified and still have tax withheld abroad. Those are two separate questions. See foreign dividend withholding tax for the second one.

Condition 2: dividends that never qualify

Some payments are called dividends but are always taxed as ordinary income, or are not dividends at all:

• Most REIT dividends. A REIT pays little or no corporate tax, so its regular dividends are ordinary. They appear in box 5 of Form 1099-DIV as Section 199A dividends, and up to 20% of them can be deducted.
• Money market fund dividends. They are reported as dividends but are ordinary.
• "Dividends" on deposits at credit unions and savings institutions. These are interest.
• Capital gain distributions from funds. They are taxed as long-term capital gains and reported in box 2a.
• Payments in lieu of dividends. If your broker lent out your shares over the dividend date, you receive a substitute payment instead of the dividend, and it is ordinary income.
• Dividends on shares held in an employee stock ownership plan (ESOP).

For a mutual fund or an ETF, only part of the payout may qualify. The fund works out the share that came from qualified dividends it received, and reports that part in box 1b.

Condition 3: the holding period

You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. In practice that means at least 61 days.

Two counting rules from Publication 550 matter:

• Count the day you sold the stock, but not the day you bought it.
• The 61 days do not have to be consecutive, but they must all fall inside the 121-day window.

Here is an example with an ex-dividend date of June 15, 2026. The window runs from April 16 to August 14.

In the first row you bought before the ex-dividend date and received the dividend, but you sold too soon. The dividend is ordinary.

For preferred stock the rule is stricter when the dividend covers a period of more than 366 days: more than 90 days during the 181-day period that begins 90 days before the ex-dividend date.

Days do not count toward the holding period while you are protected against a fall in the share price. Publication 550 names three cases: you hold an option to sell or have an open short sale of substantially identical stock, you have granted an option to buy it, or you hold another position that reduces your risk of loss.

Box 1b does not guarantee your holding period

This is the detail most guides leave out.

Box 1b of your Form 1099-DIV is filled in by your broker or the fund. The IRS instructions tell them to include dividends "for which it is impractical to determine" whether the holding period was met. In other words, box 1b assumes you held long enough.

Publication 550 is explicit that the final answer is yours. Its own example describes an investor who bought 5,000 shares one week before the ex-dividend date and sold them a month later. The Form 1099-DIV showed $500 in box 1b. The IRS conclusion: "You have no qualified dividends from XYZ Corp. for 2025 because you held the XYZ stock for less than 61 days."

If you buy and sell around dividend dates, check your own holding period before copying box 1b onto your return. For a buy-and-hold investor the box is almost always right.

How to report them

• Line 3b of Form 1040: total ordinary dividends, from box 1a.
• Line 3a of Form 1040: qualified dividends, from box 1b, adjusted if you failed the holding period.
• Schedule B: required if your ordinary dividends are more than $1,500, according to IRS Topic 404.

The lower rate is not applied through the regular tax tables. It is calculated on the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, which tax software fills in for you.

What this means for your portfolio

Three practical points follow from the rules.

Holding longer costs nothing and can lower your tax. A dividend investor who keeps shares for years meets the holding period without thinking about it.

Account type changes the picture. Inside an IRA or a 401(k), the distinction does not matter, because dividends are not taxed when they are paid. That makes these accounts a natural home for REITs and other payers of ordinary dividends. See dividends in retirement accounts.

Compare yields after tax. A higher yield taxed at your full income rate can leave you with less than a lower yield taxed at 15%. Your real dividend income after taxes walks through the calculation.

In OnlyDividends you set one tax rate per portfolio, so a simple way to reflect this is to keep holdings that are taxed alike together: one portfolio at your qualified rate, another for REITs at your income rate, and your IRA at 0%.

Frequently asked questions

How do I know if my dividends are qualified or ordinary?

Look at Form 1099-DIV. Box 1a is the total of your ordinary dividends, and box 1b is the part your broker reports as qualified. Then check that you held each stock for at least 61 days around its ex-dividend date, because box 1b does not verify that.

How much of my qualified dividends are 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. Anything above the threshold is taxed at 15%, and at 20% above the upper threshold.

What is the highest tax rate on qualified dividends?

20%, for taxable income above $545,500 for a single filer or $613,700 for a married couple filing jointly in 2026. With the 3.8% net investment income tax, the top federal rate is 23.8%.

Are REIT dividends qualified?

Mostly not. Regular REIT dividends are ordinary income, although up to 20% of them can be deducted as Section 199A dividends. A small part of a REIT payout can be qualified or a capital gain; your Form 1099-DIV shows the split.

Are reinvested dividends qualified?

Reinvesting does not change how a dividend is taxed. A reinvested dividend is qualified or ordinary under the same three conditions as one paid in cash, and it is taxable in the year it is paid.

Do I report both ordinary and qualified dividends?

Yes. Total ordinary dividends go on line 3b of Form 1040 and qualified dividends on line 3a. The qualified amount is part of the total, not an addition to it.

Are qualified dividends taxed twice?

In a sense, yes. The company pays corporate tax on its profit, and you then pay tax on the dividend paid out of what is left. The lower rate on qualified dividends exists to soften that.

Disclaimer

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