Qualified Dividend Tax Rate Explained: How It Works and How To Pay Less in Taxes

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If you own dividend-paying stocks in a taxable brokerage account, there’s a good chance you’ll owe taxes on that income. The good news is that qualified dividends are taxed at lower rates than ordinary income, which can translate into hundreds or even thousands of dollars in annual tax savings.

In this guide, you’ll learn what the qualified dividend tax rate is, how dividends qualify for preferential treatment, how the IRS taxes them and practical strategies to reduce taxes on dividend income.

Everything below reflects current federal tax rules and official IRS guidance.

Quick Answer: What Is the Qualified Dividend Tax Rate?

The qualified dividend tax rate is the reduced federal tax rate applied to dividends that meet specific IRS requirements. For 2025, qualified dividends are taxed at:

• 0%
• 15%
• 20%

The rate you pay depends on your taxable income and filing status. Dividends that don’t meet IRS requirements are taxed as ordinary income, with rates as high as 37%.

Qualified Dividend Tax Rates At a Glance

Source: IRS — Capital Gain Tax Rates for Individuals

What Is the Qualified Dividend Tax Rate?

The qualified dividend tax rate is the special, lower tax rate that’s applied to dividends that meet specific IRS requirements. For 2025, these rates are 0%, 15%, or 20%, based on your taxable income and filing status. Non-qualified or “ordinary” dividends, however, are taxed using the standard income tax brackets. 

Why the IRS Taxes Qualified Dividends Differently 

The IRS treats qualified dividends more favorably than ordinary income to encourage long-term investment in U.S. companies. By taxing these dividends at the same rate as long-term capital gains, the tax code rewards investors who hold stocks for extended periods instead of trading frequently.

By offering lower tax rates, the tax code:

• Rewards investors who hold stocks longer
• Encourages stability in capital markets
• Supports business growth through long-term ownership

According to the Congressional Research Service, preferential tax treatment for dividends is intended to reduce double taxation and promote investment. This preferential treatment reflects a policy goal of prompting stable, long-term investments. This supports business growth and economic stability alike. 

What Makes a Dividend “Qualified”?

Not all dividends receive preferential tax treatment. To qualify, dividends must meet holding period rules and be paid by eligible companies.

Holding Period Requirements 

To be considered qualified, you must hold the stock:

• More than 60 days during the 121-day period beginning 60 days before the ex-dividend date

For preferred stock paying dividends for periods longer than 366 days:

• You must hold the shares for more than 90 days during the 181-day period beginning 90 days before the ex-dividend date

Common Mistakes Investors Make 

Many investors unknowingly disqualify their dividends by doing one of the following:

• Selling too soon: If you buy stock just before the ex-dividend date and sell shortly after receiving the dividend, you haven’t met the holding period requirement. 
• Not tracking purchase dates: With multiple purchases of the same stock over time, determining which shares meet the holding requirement can be complex. Many investors don’t realize that some of their dividend income doesn’t qualify.
• Ignoring preferred stock rules: Preferred stock dividends have longer holding period requirements that investors often overlook.

Eligible Companies and Investments 

Qualified dividends are only available for eligible companies and investments. The dividends must have been paid by a U.S. corporation or a qualified foreign corporation.

Dividends from foreign companies can qualify if the company is incorporated in a U.S. possession, the company is eligible for benefits under a U.S. tax treaty, or the stock is readily tradable on an established U.S. market. Always double-check to see if your dividends qualify based on current requirements. 

Qualified vs Ordinary Dividends 

Do you know the difference between qualified and ordinary dividends, and how it impacts your tax bill? Let’s dive deeper. 

Tax Rate Comparison 

There’s a substantial difference in tax treatment between qualified and ordinary dividends.

As we’ve noted, qualified dividends are taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on your income level.

Ordinary dividends, meanwhile, are taxed as ordinary income at your marginal tax rate, which can range from 10% to 37%. 

For example, if you’re in the 32% tax bracket and receive $10,000 in dividends, the tax difference is dramatic:

• Qualified dividends will be taxed at a 20% rate, meaning you pay $2,000 in taxes.
• Ordinary dividends will be taxed at the 32% rate, meaning you pay $3,200 in taxes. 

This is a $1,200 difference on just $10,000 of dividend income. 

Why Some Dividends Don’t Qualify 

Several types of dividends are always treated as ordinary income, regardless of how long you hold the investment. These include:

• Real Estate Investment Trusts (REITs): REIT dividends are generally considered ordinary income because they represent pass-through income from the REIT’s operations instead of corporate earnings.  
• Money market funds: Interest and dividends from money market funds are always taxed as ordinary income.  
• Short-term holdings: Any dividends from stocks that you haven’t held for the required holding period are non-qualified dividends.  
• Master Limited Partnerships (MLPs): Distributions from MLPs often don’t qualify. 
• Tax-exempt organizations: Dividends from certain tax-exempt entities may not qualify. 

How Qualified Dividends Are Taxed in Real Life 

Let’s look at a few hypothetical scenarios to see how qualified dividend taxation may work for different types of investors:

Example for a Long-Term Investor 

Laila is 58 and single, with a taxable brokerage account holding dividend stocks that she’s owned for years. In 2025, here’s her financial situation: 

• Salary: $85,000
• Qualified dividends: $12,000
• Standard deduction: $15,750
• Taxable income before dividends: $69,250

Her qualified dividends are taxed at 15%, because her total taxable income falls within the 15% bracket for single filers. She pays $1,800 in federal tax on her dividends. 

If these were ordinary dividends instead, they’d be taxed at her 22% marginal rate. This would cost her $2,640, an extra $840 in taxes. 

Example for a Retiree 

Michael and Linda are both 68, married, and living on investment income and Social Security. Here’s their breakdown:

• The taxable portion of their Social Security: $28,000
• Qualified dividends: $30,000
• Standard deduction since they’re both over 65: $34,700 

Because their taxable income stays below the threshold, they’ll pay 0% federal tax on their qualified dividends. This means they’re paying no taxes on $30,000 in dividend income. 

Where To Find Qualified Dividends on Your Tax Forms 

Your brokerage will send you a Form 1099-DIV by January 31st each year, showing all dividend income received during the previous year.

Form 1099-D has several boxes, but these two are the most important when it comes to understanding your qualified and non-qualified dividends: 

• Box 1a – Total ordinary dividends: This box shows all dividends you received in total, including both qualified and non-qualified dividends. 
• Box 1b – Qualified dividends: This subset of Box 1a shows only the dividends that qualify for preferential treatment. 

The difference between Box1a and Box1b will help you understand which ordinary dividends are taxed at your standard income tax rate, and which are qualified dividends.

Strategies To Reduce Taxes on Dividend Income 

You can use several smart strategies to minimize taxes on dividend income while maintaining your investment strategy. Let’s review each:

Asset Location Strategies

Where you hold dividend-paying investments matters significantly more for tax purposes.

Keep high-dividend yield investments like REITs, bonds, and preferred stocks in tax-advantaged accounts like traditional IRAs or 401(k)s. Since these generate ordinary income anyway, placing them in tax-deferred accounts can have a positive impact on that annual tax hit.

Meanwhile, hold stocks with qualified dividends in taxable brokerage accounts. You’ll benefit from the preferential tax rates, and if you eventually sell, you’ll also get long-term capital gains treatment. 

Tax-Advantaged Accounts

Tax-advantaged accounts eliminate current dividend taxation. Traditional IRAs and 401(k)s defer all taxes until withdrawal. Roth IRAs, meanwhile, allow completely tax-free growth.

However, dividends in these accounts don’t benefit from qualified rates; they’re either tax-deferred or tax-free entirely.

Timing Dividend Income 

Timing dividend income can help you manage your tax brackets strategically. If you’re near a threshold, consider whether selling dividend-paying stocks before year-end keeps you in a lower bracket.

High-income investors subject to the 3.8% Net Investment Income Tax should note that this applies to qualified dividends if your modified AGI exceeds $200,000 if you’re filing single and $250,000 if you’re married filing jointly.  

Final Take to GO

Understanding the qualified dividend tax rate can save you thousands of dollars every year. By ensuring your dividends qualify for preferential treatment — and strategically locating dividend-paying investments in the right accounts — you can significantly reduce your tax burden. 

As you plan for the upcoming tax season, review your holdings to verify which dividends qualify, check your Form 1099-DIV carefully, and consider whether adjusting your investment locations could improve your after-tax returns.

For investors with substantial dividend income, consulting a tax professional can help you determine specific strategies that may be beneficial for your situation.

Data is accurate as of Jan. 26, 2026, and is subject to change.

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