It has to be ‘qualified’ to pass

Q: How are my dividends taxed?

A: The rate at which dividends are taxed hinges on two main factors: your marginal tax bracket and whether the dividend is “qualified.”

To be qualified, a dividend needs to meet two requirements. First, it must be paid by a U.S. corporation or a foreign corporation traded on a major U.S. stock exchange. Second, you must have owned the stock for more than 60 days in the 121-day period starting 60 days prior to the ex-dividend date.

Also, dividends paid by passthrough companies, such as realestate investment trusts, typically aren’t considered to be qualified.

If yours isn’t a qualified dividend, it will be taxed as ordinary income at your marginal tax rate, or tax bracket. If it is qualified, it is taxed at rates of 0% for the two lowest brackets, 15% for the 25% to 35% brackets and 20% for the top bracket. High earners are subject to an additional 3.8% net investment income surtax, regardless of whether their dividends are qualified.

Finally, if you hold your dividend stock in an IRA, you won’t have to pay any dividend taxes on an ongoing basis. Rather, any withdrawals from a traditional IRA will be treated as ordinary income, but you won’t pay a penny as long as you leave the money in the account. And with a Roth IRA, any qualified distributions, even dividend income, are completely tax-free.