How to Reduce Dividends

Reducing Dividends

Dividend income may come with negative consequences, such as a raised tax bracket or higher taxation of social security benefits. There are a few ways to reduce dividends in a portfolio to show a smaller income level on a 1040. Here are some steps to lower dividends.

Things You'll Need

• 1040 Dividend Income Schedule
• Investment Statement Detail Page

Instructions

1. 

   List Investment Dividends

   Find the culprits. Line item all investments in the portfolio and annual expected yields to find which are the highest dividend payers. Most brokerage statements will list annual expected income. If not, call the institution to find out dividend rates. Highlight the highest dividend income investments in the portfolio.

2. 

   Use Shelters For Dividends

   Look for sheltering opportunities. Some investors have highly taxed dividends in basic, taxable brokerage accounts, while more tax efficient investments are sheltered inside IRAs, Roth IRAs, or other shelters. Rearrange investments so dividend paying investments are inside tax shelters.

3. 

   Find Tax Advantaged Investments

   Find investments with tax advantaged dividends if you need income. Municipal bonds, for example, are federally and sometimes state tax free and many pay dividends.

4. 

   REITs May Be Attractive

   Investigate REITs. Real Estate Investment Trusts may be illiquid investments and can fluctuate. However, dividends from REITs have tax advantages which may beat bond interest rates. According to the independent research company Morningstar, 15-year REIT dividends average around 8%, and "for tax purposes, dividends are allocated to ordinary income, capital gains, and return of capital." Return of capital is untaxed and capital gains taxes are lower for many investors than ordinary income, allowing dividends a nice tax advantage for many investors.

5. 

   Annuities Defer Taxes

   Investigate annuities. According to financial guru Jean Chaatzky, Financial Editor for the "Today" show, the money in a deferred annuity "grows tax deferred and when you're ready (and contractually able), you will start receiving payments." Earnings on an annuity may not be removed until after age 59 ½ without a tax penalty, but if looking for extra retirement dollars this avenue may be an attractive way to reduce dividends in a portfolio.

Tips & Warnings

• Use software to calculate when you'll probably need access to dollars. Many strategies restrict access to money until certain dates, so precalculating withdrawal points should give an investor peace of mind knowing dollars are properly invested.

References

• Morningstar: Benefits of REITs
• "Money 991"; Jean Chatzky; 2010.