Ordinary Dividends

Ordinary Dividends — What They Are and How They’re Taxed

Definition

Ordinary dividends (also called nonqualified dividends) are regular payments corporations make to shareholders from company profits. They are the default classification for dividend payments unless the dividend meets specific IRS criteria to be treated as a qualified dividend.

Key takeaways

• Ordinary dividends are taxed as ordinary income at your regular federal income tax rates.
• Qualified dividends, if they meet IRS requirements (source and holding period), are taxed at the lower long-term capital gains rates.
• Dividend income is reported by payers on Form 1099‑DIV (box 1a) and entered on your tax return (Schedule B for many filers).

How ordinary and qualified dividends differ

Dividends fall into two categories:
* Qualified dividends — generally eligible for long-term capital gains tax rates if they come from a U.S. corporation (or qualifying foreign corporation) and satisfy required holding periods.
* Ordinary (nonqualified) dividends — taxed as ordinary income when the payment does not meet the qualified-dividend rules.

Holding period examples cited by the IRS:
* Common stock: at least 60 days
Certain preferred stock: 90 days
Dividend-paying mutual funds: 60 days

If the holding-period or other qualification rules aren’t met, the dividend is treated as ordinary.

Tax reporting and where to include dividends

• Payers report total ordinary dividends on Form 1099‑DIV (box 1a).
• Many taxpayers report dividend income on Form 1040, Schedule B (if required).
• Ordinary dividends are included with other ordinary income and taxed at your regular federal income tax brackets.

Example

If you own 100,000 shares of a company that pays $0.20 per share in dividends, you receive $20,000 in dividend income (100,000 × $0.20). If those dividends are nonqualified, the $20,000 is taxed as ordinary income rather than at the lower qualified-dividend capital gains rate.

Brief history of dividend tax treatment

Legislation since the early 2000s has shifted qualified dividends into the lower long-term capital gains tax structure. Subsequent laws extended and adjusted these provisions. As of 2025, the maximum federal tax rates cited for dividends are:
* Qualified dividends: up to 20%
* Ordinary dividends: up to 37%

(Individual circumstances, taxable income levels, and additional surtaxes such as the Net Investment Income Tax may affect the effective tax rate.)

FAQs

Q: How do I earn ordinary dividends?
A: By owning dividend-paying stocks, mutual funds, REITs, or similar equity investments that distribute earnings.

Q: How are ordinary dividends taxed?
A: They are taxed as ordinary income at your regular federal income tax rates unless they qualify for the lower qualified-dividend rates.

Q: What determines whether a dividend is qualified?
A: Source of the dividend (U.S. or qualifying foreign corporation) and meeting IRS holding-period and other requirements.

Bottom line

Ordinary dividends are periodic distributions of corporate profits to shareholders that are taxed as ordinary income unless they meet specific IRS requirements to be treated as qualified dividends and taxed at preferential capital gains rates. Monitor your 1099‑DIV and consult tax guidance or a tax professional if you have questions about dividend classification or tax reporting.