Dividend Tax
The tax levied on income received from corporate dividend distributions to shareholders.
What is Dividend Tax?
Dividend tax applies to income investors receive from owning shares in a corporation. The tax rate depends on whether dividends are classified as qualified or ordinary (non-qualified). Qualified dividends—paid by U.S. corporations and held for the required holding period—are taxed at the lower long-term capital gains rates (0%, 15%, or 20% depending on income). Ordinary dividends are taxed at the taxpayer's marginal income tax rate, which can reach 37% federally. Many states also tax dividend income at the ordinary income rate.
Example
An investor in the 22% federal income tax bracket receives $5,000 in qualified dividends and $2,000 in ordinary dividends. The qualified dividends are taxed at 15% ($750), while the ordinary dividends are taxed at 22% ($440). Total federal dividend tax owed: $1,190.
Source: IRS Topic No. 404 — Dividends