Dividend Income vs. Ordinary Income

Depending on the type of income you earn, you might pay different tax rates on your earnings. To know what you will pay, you'll need to know whether your income is considered ordinary income or capital gains income. Dividend income can be either, depending on the situation.

Ordinary Income

Most of the income that people receive is considered "ordinary income" by the IRS. Some of these include wages, bonuses, business income, interest and gambling winnings. Dividends are also considered ordinary income in most situations. Capital gains -- earnings on the sale of an asset -- are not treated as ordinary income unless the asset was held for less than a year.

Dividend Income

When you invest in a company, you hope that it will make a profit. If it does, the profits are either reinvested in the company or distributed to its shareholders. This distribution takes the form of a dividend -- a payment to the shareholders. According to the IRS, this payment is ordinary income unless it is considered a qualified dividend.

Qualified Dividends

Qualified dividends meet certain qualifications and are taxed as capital gains. Such dividends must have been paid by a U.S. corporation or a qualified foreign corporation. You must have held the stocks for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Also, the dividend cannot be listed by the IRS as one that is not a qualified dividend. Some dividends listed as not being qualified are dividends from tax-exempt organizations, payments in lieu of dividends, and dividends paid on deposits with mutual savings banks, credit unions or similar financial institutions.

Taxes

Taxes for ordinary income -- including non-qualified dividends -- range from 10 percent for a person earning up to $8,700 to 35 percent for a person earning more than $388,350, as of 2012. Qualified dividends are taxed at 0 percent or 15 percent, just as capital gains, as of 2012. If your tax bracket is 25 percent or higher, you pay 15 percent tax on qualified dividends. If your tax rate is less than 25 percent, you pay 0 percent on your qualified dividends.

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