Dividend And Investment Tax in United States

What are qualified versus ordinary dividends?

The Internal Revenue Code splits dividend income into two categories with materially different tax rates [SC1]. Qualified dividends, defined in IRC §1(h)(11), are taxed at the preferential long-term capital gains rates of 0, 15, or 20 percent. Ordinary (non-qualified) dividends are taxed at the filer's ordinary marginal income tax rates, which run 10, 12, 22, 24, 32, 35, or 37 percent for 2025 across the seven federal brackets.

To qualify as a qualified dividend, the distribution must meet two tests:

1. Payer test: The dividend must be paid by a US C corporation or a qualified foreign corporation. A qualified foreign corporation is one that is incorporated in a US possession, is eligible for benefits of a comprehensive US income tax treaty that includes an exchange-of-information clause, or whose stock is readily tradable on an established US securities market. Most large-cap foreign companies with US-listed ADRs meet the third prong.
2. Holding-period test: The shareholder must hold the underlying common stock for more than 60 days during the 121-day window that begins 60 days before the ex-dividend date. For preferred stock dividends that are attributable to a period of more than 366 days, the holding-period requirement is 90 days during the 181-day window beginning 90 days before the ex-dividend date.

Dividends paid by REITs, money market funds, and most mutual funds (to the extent the fund's underlying income is interest rather than qualified dividends) are ordinary. Capital gains distributions from a mutual fund are reported separately (as capital gain distributions on Form 1099-DIV box 2a) and flow to long-term capital gain treatment regardless of holding period of the fund shares.

The payer determines and reports the qualified/ordinary split on Form 1099-DIV: box 1a shows total ordinary dividends, box 1b shows the portion that is qualified, and box 5 shows Section 199A REIT dividends eligible for the 20 percent pass-through deduction.

What are the 2025 dividend tax brackets?

Qualified dividends follow the long-term capital gains brackets set annually by IRS Rev. Proc. 2024-40 [SC2]. For tax year 2025, the qualified-dividend brackets are:

The rate bracket is determined by total taxable income, including the qualified dividends themselves. A single filer with USD 60,000 of wages and USD 5,000 of qualified dividends has USD 65,000 of taxable income (before standard deduction); USD 48,350 of that income falls in the 0 percent qualified-dividend bracket, and the remaining USD 16,650 (of which up to USD 5,000 is qualified dividends) sits in the 15 percent bracket. The qualified dividends "fall last" — they are stacked on top of ordinary income — but the bracket applied to them is set by total taxable income.

Ordinary dividends are taxed at the filer's regular marginal rate, which depends on filing status and total taxable income. The 2025 ordinary brackets run 10 percent (up to USD 11,925 single / USD 23,850 MFJ), 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent (above USD 626,350 single / USD 751,600 MFJ). The 37 percent top rate applied to a non-qualified dividend is materially worse than the 20 percent qualified-dividend rate the same dollar would receive at the same income level.

How does the Net Investment Income Tax apply to dividends?

The Net Investment Income Tax (NIIT) under IRC §1411 adds 3.8 percent on the lesser of net investment income or modified adjusted gross income above filing-status thresholds [SC3]. The thresholds are USD 200,000 (single, head of household), USD 250,000 (MFJ), and USD 125,000 (MFS). They are not inflation-indexed and have been fixed since the NIIT took effect in 2013.

Dividend income — both qualified and ordinary — is included in net investment income for NIIT purposes. A single filer with USD 250,000 of wages and USD 20,000 of qualified dividends pays the 15 percent (or 20 percent at higher income) qualified-dividend rate plus the 3.8 percent NIIT on the dividend income, for a combined federal rate of 18.8 percent (or 23.8 percent) before any state-level tax.

The NIIT does not apply to dividends paid by a corporation in which the filer is an active participant under the Section 469 material-participation tests, where the corporation is a passthrough entity. For C corporations, that exception is functionally inapplicable because the filer cannot "materially participate" in the corporation in a way that excludes the dividend income from net investment income.

Filing Form 8960 (Net Investment Income Tax — Individuals, Estates, and Trusts) computes the NIIT and routes it to Schedule 2 of Form 1040. The NIIT calculation interacts with the Capital gains tax in the United States calculation because both gains and dividends are aggregated as net investment income.

What is the Section 199A pass-through deduction for REIT dividends?

IRC §199A, the qualified-business-income deduction created by the Tax Cuts and Jobs Act, provides a 20 percent deduction on qualified REIT dividends in addition to its broader application to pass-through business income [SC4]. REIT dividends reported in Form 1099-DIV box 5 (Section 199A dividends) qualify for the deduction without regard to the income-limitation phase-outs that constrain the broader §199A pass-through deduction.

A filer with USD 10,000 of Section 199A REIT dividends can deduct USD 2,000 (20 percent) from taxable income, reducing the effective tax rate on those dividends. The deduction flows through Form 8995 (Qualified Business Income Deduction Simplified Computation) or Form 8995-A (when limitations apply). It does not reduce adjusted gross income — it is an "above-the-line" deduction in computing taxable income but does not flow through to AGI-based phase-outs.

The §199A REIT-dividend deduction was scheduled to sunset at the end of 2025 under TCJA's expiration provisions, but the One Big Beautiful Bill Act enacted in mid-2025 made the deduction permanent and slightly expanded its application. Year-stamp this paragraph: the rules described reflect post-OBBBA permanent law as of mid-2026; older guidance referencing the 2025 sunset is superseded.

Mutual funds that hold REITs pass through the Section 199A character to fund shareholders; the fund's Form 1099-DIV box 5 captures the eligible REIT-dividend portion. Foreign REITs do not qualify for the §199A deduction; the deduction applies only to dividends from US REITs.

How are foreign dividends and ADR dividends taxed?

Dividends paid by foreign corporations are includible in US gross income for US persons under IRC §61 [SC5]. Whether they qualify for the preferential qualified-dividend rate depends on the qualified-foreign-corporation test in IRC §1(h)(11)(C). A foreign corporation is qualified if:

• It is incorporated in a US possession; or
• It is eligible for the benefits of a comprehensive US income tax treaty containing an information-exchange clause; or
• Its stock is readily tradable on an established US securities market (e.g., NYSE or NASDAQ).

The third prong includes American Depositary Receipts (ADRs) listed on major US exchanges. ADR dividends from companies like Toyota, Sanofi, or Royal Dutch Shell typically qualify for the preferential rate; ADR dividends from companies in non-treaty jurisdictions or on pink-sheet exchanges typically do not.

Foreign withholding tax frequently applies to dividends paid to US-resident shareholders. A US person receiving a USD 1,000 dividend from a French corporation typically has 25 percent (or 15 percent if treaty-eligible) withheld at source by France before the dividend reaches the US shareholder. The US person reports the gross USD 1,000 as dividend income and claims a Foreign Tax Credit under IRC §901 for the foreign withholding paid, mitigating double taxation. The FTC is computed on Form 1116 (or on Form 1040 directly when total foreign tax is below USD 300 single / USD 600 MFJ and only passive-category income is involved). The mechanics are covered in the Tax treaty relief crossover.

US persons holding foreign dividend-paying stocks in a foreign brokerage may also have Form 8938 (Statement of Specified Foreign Financial Assets) and FBAR (FinCEN Form 114) reporting obligations on the holding itself, separate from the dividend reporting. Filers managing cross-border dividend flows often use WorldFirst for the underlying multi-currency banking and conversion side of the dividend stream.

What about interest income, OID, and tax-exempt bonds?

Interest income is generally taxed at ordinary marginal rates and is included in net investment income for NIIT purposes. Form 1099-INT (box 1) reports taxable interest from US bank accounts, corporate bonds, and most US Treasury obligations. The category includes:

• Bank account interest: Taxed at ordinary rates; subject to state income tax in most states.
• Corporate bond interest: Taxed at ordinary rates federally and at state level.
• US Treasury obligation interest (T-bills, T-notes, T-bonds, TIPS, Series I and EE bonds): Taxed at ordinary federal rates but exempt from state and local income tax under IRC §103.
• Municipal bond interest: Generally exempt from federal income tax under IRC §103; in-state bonds are typically also exempt from state tax for resident filers. Some private-activity-bond interest is subject to the alternative minimum tax (AMT).

Original Issue Discount (OID) is the difference between the stated redemption price at maturity and the issue price of a debt instrument issued at a discount. OID accrues over the life of the instrument as ordinary income to the holder under IRC §1272, even if no cash interest is paid. Form 1099-OID reports the accrued OID each year. Zero-coupon Treasury bonds and corporate zero-coupon bonds are the most common examples — the holder reports phantom income each year despite receiving no cash, then receives a lump-sum payment at maturity.

Municipal bond interest is reported on Form 1099-INT box 8 (tax-exempt interest) and included in Schedule B but excluded from taxable income. It is, however, included in modified adjusted gross income for purposes of the Social Security benefits taxation formula and the NIIT MAGI threshold calculation. Private-activity-bond interest reported in box 9 is includible in alternative minimum taxable income (AMTI) for AMT purposes under IRC §57.

Form 1099-DIV: how to read the boxes

Form 1099-DIV (Dividends and Distributions) is the broker-issued information return for dividend distributions [SC6]. The boxes that matter for the dividend-and-investment-income return are:

• Box 1a — Total ordinary dividends: Total dividends paid, both qualified and non-qualified. Reported on Form 1040 line 3b.
• Box 1b — Qualified dividends: Portion of box 1a that meets the qualified-dividend definition. Reported on Form 1040 line 3a. The amount in box 1b is included in box 1a; it is NOT a separate addition.
• Box 2a — Total capital gain distributions: Long-term capital gain distributions from a mutual fund or REIT. Reported on Schedule D line 13 (or, if Schedule D is not required because no other capital transactions, directly on Form 1040 line 7).
• Box 2b — Unrecaptured Section 1250 gain: Portion of box 2a attributable to depreciation recapture on real estate held by the fund. Taxed at maximum 25 percent.
• Box 2c — Section 1202 gain: Gain from sale of qualified small business stock eligible for partial exclusion.
• Box 5 — Section 199A dividends: REIT dividends eligible for the 20 percent pass-through deduction on Form 8995.
• Box 6 — Investment expenses: Reported but not deductible for individuals after TCJA removed miscellaneous itemized deductions.
• Box 7 — Foreign tax paid: Foreign withholding tax claimed as a Foreign Tax Credit on Form 1116 or Form 1040 directly (within the USD 300/USD 600 simplification limits).
• Box 8 — Foreign country: Country of source for the foreign tax credit.

Mutual fund Form 1099-DIVs often include supplemental information beyond the IRS-required boxes, such as foreign-source income breakdown for FTC computation, percentage of dividends from US Treasury obligations (potentially state-tax-exempt), and the percentage of REIT dividends qualifying for §199A. These supplemental disclosures matter for accurate state-return preparation and for the §199A deduction calculation.

How are dividends from foreign mutual funds and PFICs taxed?

A Passive Foreign Investment Company (PFIC) under IRC §1297 is a foreign corporation where 75 percent of gross income is passive (interest, dividends, royalties, capital gains) or 50 percent of assets produce passive income. Most foreign mutual funds, foreign ETFs, and many foreign investment companies meet the PFIC definition. US persons holding PFIC shares face one of the most punitive corners of the US tax code [SC5]:

• Default "section 1291" excess-distribution method: Distributions in excess of 125 percent of the average of the prior three years' distributions, and gain on disposition, are allocated rateably over the holding period. Income allocated to prior years is taxed at the highest ordinary rate applicable to each year plus an interest charge for the deferral. The combined effective rate often approaches or exceeds 50 percent.
• Qualified Electing Fund (QEF) election: The PFIC shareholder elects to include current-year ordinary earnings and net capital gain in income as the PFIC earns it, similar to a US mutual fund. Requires the PFIC to provide an annual information statement to the shareholder — many foreign funds do not.
• Mark-to-market election (§1296): Available for PFIC stock that is "marketable." The shareholder marks the position to market each year, recognizing gain as ordinary income and limited losses as ordinary deductions.

The ground reality: US persons living abroad or holding foreign investment accounts frequently end up holding PFIC interests inadvertently when their local advisor recommends a domestic mutual fund product. The annual reporting (Form 8621 — Information Return by a Shareholder of a Passive Foreign Investment Company) is required for each PFIC, even when no distribution was made, with limited de-minimis exemptions. PFIC complexity is one of the most common reasons US expats engage a credentialed tax pro through resources like the US tax-pros directory covered in the Expat tax residency crossover.

State-level dividend and investment-income taxation

Most states tax dividend income as ordinary income at the state's regular income tax rates. Nine states have no state-level income tax (Alaska, Florida, Nevada, New Hampshire taxes interest and dividends only at 0 percent as of 2025 after a phased repeal, South Dakota, Tennessee, Texas, Washington, Wyoming). New Hampshire's interest-and-dividends tax was 5 percent in 2022 and is repealed effective 2025; the state now has no personal income tax of any kind.

Some states provide preferential rates on long-term capital gains or qualified dividends:

• Hawaii: Caps long-term capital gain rate at 7.25 percent (vs. ordinary rates up to 11 percent).
• South Carolina: Excludes 44 percent of net long-term capital gains.
• Wisconsin: Excludes 30 percent of long-term capital gains.
• Arkansas: Excludes 50 percent of long-term capital gains.

States without state income tax do not tax dividends regardless of source. Tax-exempt municipal bond interest is typically exempt from federal income tax and from the issuer's state income tax. Inter-state holders of municipal bonds (e.g., a California resident holding a New York muni bond) pay state income tax to their state of residence on the interest even though the federal exemption holds.

For practitioners issuing Form 1099-DIVs to investors in their managed funds, e-filing platforms like Tax1099 handle the broker-issuance side. For a full picture of how dividend taxation interacts with the rest of the federal stack, see the Capital gains tax crossover for the shared 0/15/20 brackets, Crypto taxation for digital-asset distributions, and the US federal tax overview for the full stack. The Dividend and investment topic hub compares US treatment to other jurisdictions.