2025 Ordinary Dividends Explained: Definition, Tax Rates & Examples

Andy Smith, a Certified Financial Planner (CFP®) and experienced realtor, brings over 35 years of expertise in personal finance, corporate finance, and real estate to help investors achieve their financial goals.

What Are Ordinary Dividends in 2024?

Ordinary dividends are periodic payments made by corporations to shareholders, representing a portion of the company's profits. These dividends are the most common type of dividend income received by stockholders and are typically taxed as ordinary income.

While all dividends start as ordinary by default, some may qualify as "qualified dividends" if they meet specific IRS criteria, which allows them to be taxed at a lower capital gains rate. Understanding these distinctions is essential for effective tax planning.

Key Insights

• Ordinary dividends are nonqualified dividends paid to shareholders of record.
• They are taxed at standard federal income tax rates, unlike qualified dividends taxed at a lower capital gains rate.
• Qualification depends on factors such as the type of stock, holding period, and issuer.

How Ordinary Dividends Work

Dividends fall into two main categories: ordinary (nonqualified) and qualified. The IRS classifies dividends based on the stock type and holding period. To be considered qualified, dividends must come from U.S. companies or qualifying foreign corporations and meet minimum holding periods: 60 days for common stock, 90 days for preferred stock, and 60 days for mutual funds.

Ordinary dividends include payments from real estate investment trusts (REITs) and other earnings that don’t meet these qualifications. These dividends are reported on Form 1099-DIV, Box 1a, and must be included on IRS Form 1040, Schedule B, Line 5.

Taxation Changes and Rates for Ordinary Dividends

Tax rates on dividends have evolved over the years due to legislative acts such as the Jobs and Growth Tax Relief Reconciliation Act of 2003 and subsequent laws. As of 2024, ordinary dividends are taxed at the taxpayer's regular federal income tax rate, with a top marginal rate of 37%. In contrast, qualified dividends are taxed at a maximum rate of 20%.

Recent tax reforms, including the 2017 Tax Cuts and Jobs Act, have maintained these distinctions. Future changes remain possible depending on legislative developments.

Quick Fact

In 2024, the maximum tax rates are 37% for ordinary dividends and 20% for qualified dividends.

Example: Calculating Ordinary Dividends

Imagine Joe Investor owns 100,000 shares of Company ABC, which pays an ordinary dividend of $0.20 per share annually. Joe receives $20,000 in dividends each year, which are taxed at his ordinary income tax rate because these dividends are not qualified.

How to Earn Ordinary Dividends

Owning dividend-paying stocks is the primary way to earn ordinary dividends. These regular payments provide investors with a steady income stream from their equity investments.

Summary: Ordinary vs. Qualified Dividends

The key difference lies in taxation: ordinary dividends are taxed as regular income, while qualified dividends enjoy lower capital gains tax rates. Knowing which dividends you receive helps optimize your tax strategy.

Final Thoughts

Ordinary dividends are a fundamental component of shareholder returns, representing a share of corporate profits paid regularly. Understanding their tax treatment and how they differ from qualified dividends is critical for investors aiming to maximize after-tax income.

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