What Is Dividend Income? Do Dividends Count as Income?

What Is Dividend Income?

By Jason Hall – Updated Sep 13, 2025 at 5:45 PM EST

Key Points

Companies can reinvest earnings or pay dividends, which may include cash or stock.
IRS views most dividends as taxable; rates vary by dividend type and income.
Holding dividends in retirement accounts may defer or reduce taxes due.

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dividend income — Image Source: Getty Images

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Infographic defining and comparing qualified and nonqualified dividends — Image source: The Motley Fool

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Data source: IRS.

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Below are the income tax brackets for the 2022 tax year:

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Data source: IRS.

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Meanwhile, qualified dividends get taxed at the long-term capital gains tax rate. Here are the rates and income brackets for 2021:

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Data source: IRS.

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Here are the rates and income brackets for 2022:

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Data source: IRS.

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Because the IRS taxes nonqualified dividends at higher rates, investors should consider owning them in a tax-advantaged account like an individual retirement account (IRA). Although for higher-income individuals, there's certainly no harm in owning qualified dividend payers in tax-advantaged accounts to defer or avoid taxes on that income.

Dividend revenue in business

It's worth noting that there are different tax rules for dividends received by corporations. For example, the dividends received deduction (DRD) allows a company that receives a dividend from another company to deduct that payout from its income, which would reduce its income tax. However, several rules apply, and potential deductions range from 70% of the dividend to 100%.

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About the Author

Jason Hall is a contributing Motley Fool stock market analyst with more than a decade of experience writing about dividend stocks and long-term investing. He has been with the company since 2012 and previously spent over 10 years in technical sales in the printing and information services industry. Jason also founded and operated a small food manufacturing business.

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Are dividends considered income?

The IRS considers most dividend payments to be taxable income. There are two types of taxable dividend income:

Qualified dividends

Qualified dividends must meet certain IRS requirements to qualify for a lower tax rate. The payee must be a U.S. corporation or a qualified foreign corporation (incorporated in a U.S. possession, located in a nation covered by an income tax treaty with the U.S., or with shares readily trading on a U.S. stock market exchange). Further, a recipient must hold the underlying stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date, which is the first day a stock trades without the dividend priced into its shares.

Nonqualified or ordinary dividends

Nonqualified or ordinary dividends do not meet those requirements to qualify for a lower tax rate. As a result, the IRS taxes them based on the recipient's ordinary income tax rate.

However, not all distributions from a company or investment are taxable dividend income. Special cases include:

Return of capital: A repayment of some or all of an investor's investment in a company's stock. These payments reduce an investor's adjusted cost basis in the investment. A distribution usually qualifies as a return of capital if the company doesn't have any accumulated or current-year earnings.

Capital gains distributions: Several entities, including regulated investment companies (e.g., mutual funds, exchange-traded funds, and money market funds) and real estate investment trusts, may pay a capital gains distribution. These payments get taxed as long-term capital gains.

Spinoffs: Companies can spin off a portion or all of their ownership interest in a business unit through a stock dividend to existing shareholders, which can be tax-free or taxable depending on the structure.

Stock dividends: When companies issue and distribute a new share class to shareholders, they'll often call it a stock dividend. However, unlike dividends paid with stock in lieu of cash, these are similar to those issued in a stock split, in which investors receive an equal amount of the new shares based on the proportion of existing stock they already own.

You may also be wondering: Are dividends earned income? According to the IRS, no. Earned income "includes all the taxable income and wages you get from working for someone else, yourself or from a business or farm you own."

What Is Dividend Income?

Key Points

Dividend revenue in business

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Example of dividend income

Are dividends considered income?

Qualified dividends

Nonqualified or ordinary dividends

Tax treatment of dividend income

Dividend revenue in business

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Interest and dividend income

Dividend income doesn't have to be taxable

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