How Mutual Fund Dividends Are Taxed

Taxation of Mutual Fund Dividends

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Knowing how mutual fund dividends are taxed can help investors choose the right funds for them and the best accounts to hold these funds. You might even decide that dividend funds aren't the best funds for your investment objectives or your tax situation. You don't want to wonder why you got a 1099 form in January because you didn't do your homework on mutual fund taxation in advance.

Key Takeaways

  • As with stocks, dividends paid by mutual funds are taxed at your federal income tax bracket unless certain holding periods are met, in which case the "qualified dividends" may be taxed at a lower rate.
  • Consider holding funds that pay dividends in a tax-advantaged account, such as an IRA or 401(k), to minimize or avoid taxation.
  • Investors should also be aware of the taxation on mutual fund capital gains distributions.

What Are Dividends?

Dividends are payments to shareholders of stocks, bonds, or mutual funds. These payments represent a company's profit that's divided among the shareholders. Mutual fund investors can choose whether they want dividends to be reinvested to buy more shares or to be received as cash payments deposited into another account.

Mutual Fund Dividend Taxation

Mutual fund shareholders can be taxed on a fund’s dividends, even if these distributions are received in cash or reinvested in additional shares. Dividends aren't taxable to the investor while they're held in certain tax-deferred and tax-advantaged accounts, such as an IRA, 401(k), or an annuity. An investor instead pays income taxes on withdrawals during the taxable year the distribution is made.


Some mutual funds, such as municipal bond funds, may pay income to shareholders that's exempt from federal taxation. This is the case even if they're held in a taxable brokerage account.

Mutual fund dividends in taxable accounts, such as individual and joint brokerage accounts, are generally taxed either as qualified dividends or as ordinary income at the individual's income tax rate or as qualified dividends. Qualified dividends are taxable up to a 20% maximum rate.

Ordinary and qualified dividends are reported to mutual fund investors on the tax Form 1099-DIV. The mutual fund investor reports dividends on Form 1040, Schedule B, and Form 1040, lines 9a and 9b for tax filing purposes.

Frequently Asked Questions (FAQs)

What are the tax rates for dividends?

Individuals and married taxpayers in the 10% and 12% federal income tax brackets pay 0% on eligible dividends and most capital gains. Those in the 22%, 24%, 32%, and 35% pay 15% in taxes, and those in the 37% bracket pay 20%. Income received from qualified dividends is taxed at the same rate as long-term capital gains.

What are qualified dividends?

Qualified dividends are unhedged shares. There were no short sales, puts or calls with the shares during the holding period. They usually derive from shares in domestic corporations. You must hold them for a specified period and they can then be taxed at the more favorable long-term capital gains rate of 0%, 15%, or 20%, depending in your modified adjusted gross income (MAGI).

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as tax advice or investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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  1. IRS. "Publication 550, Investment Income and Expenses (Including Capital Gains and Losses."

  2. Fidelity Investments. "Qualified Dividends."

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