7502 / How is a shareholder taxed on cash dividends received?

Ordinary cash dividends, whether paid on common or preferred stock, are generally included in the shareholder’s gross income for the year in which they are actually received, regardless of the period for which they are paid. However, if there is an earlier constructive receipt, the shareholder will be taxed in the year in which the constructive receipt occurs.¹ Thus, dividends that have accumulated prior to an individual’s purchase of cumulative preferred stock are taxed to the purchaser as dividends when actually or constructively received; accumulated dividends are not a return of a portion of purchase price and, thus, do not reduce tax basis.²

Under JGTRRA 2003, as extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) and the American Taxpayer Relief Act of 2012 (“ATRA”), “qualified dividend income” (generally, dividends paid by domestic corporations and certain foreign corporations to shareholders, see Q 702) is taxed at the lower rates applicable to net long-term capital gain (although dividends are not taken into account in the capital gain and loss netting process used to compute net capital gain). Nonqualifying dividends continue to be treated as ordinary income subject to ordinary income tax rates.

ATRA increased the tax rate for qualified dividend income and capital gains for certain higher income taxpayers. For tax years beginning after 2012 and before 2018, the maximum rate on qualified dividend income was 20 percent for taxpayers in the 39.6 percent income tax bracket; that is, qualified dividend income that would otherwise be taxed at a 39.6 percent rate was subject to only a 20 percent tax. However, these higher income taxpayers may also be subject to the additional 3.8 percent net investment income tax. For taxpayers in the 25, 28, 33, or 35 percent income tax brackets (see Q 753), the maximum rate on qualified dividend income was 15 percent from 2012-2018. For taxpayers in the 15 and 10 percent income tax brackets, the tax rate on qualified dividend income was reduced to 5 percent in 2003 through 2007, and to 0 percent for tax years beginning after 2007 and before 2018.³

For 2025, the 0 percent rate will apply to joint filers who earn less than $96,700 (half the amount for married taxpayers filing separately), heads of households who earn less than $64,750, single filers who earn less than $48,350 and trusts and estates with less than $3,250 in income.