How to Reduce Dividends on a Stock Return

Lowering dividends on stock returns.

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

Difficulty:

Moderate

Instructions

Things You'll Need

• 1040 Schedule DIV
• Brokerage statement

1. Find highest-dividend stocks. Blue pen in front of invoice image by millann from Fotolia.com

   Find which stocks are the culprits. Line-item all stocks in the portfolio and annual expected dividends. Last year's 1040 Schedule B will help determine past dividends paid, and most brokerage statements list expected dividends. If not, call the company and ask about dividend rates. Highlight the highest-dividend-paying investments in the portfolio.

2. Open IRA or Roth. TAX TIME image by brelsbil from Fotolia.com

   Look for opportunities to shelter. If your stocks are in basic, taxable brokerage accounts, explore more tax-efficient sheltering opportunities inside IRAs, Roth IRAs, or 401k's which allow stock purchases. Rearrange investments so dividend-paying investments are inside tax shelters.

3. Tax-advantaged investments. USA dollar sign image by Pete Linforth from Fotolia.com

   Substitute investments with tax-advantaged dividends if you need income. Switching to municipal bonds may allow you to still receive dividends, but dividends that are often tax free at federal and state level.

4. Annuities lower dividend tax. calculator with coins #3 image by Adam Borkowski from Fotolia.com

   Investigate annuities. A stock-based investment in a deferred annuity grows tax deferred. Earnings on an annuity may not be removed until after age 59 1/2 without a tax penalty, but this avenue may be an attractive way to reduce dividends in a stock-market-based portfolio.

5. Slow down trading stocks. conceptual international business/customer service image by Stasys Eidiejus from Fotolia.com

   Slow your trading rate. Stocks qualify for lower tax treatment of dividends only if held 60 days prior to and after the "ex-dividend" date to discourage traders from swooping in to claim dividends and purchase another stock. Be aware of potential dividends being paid on an issue before trading to gain lower tax treatment status.

6. Some dividends are tax qualified. snatch image by Valentin Mosichev from Fotolia.com

   Purchase stocks with "qualifying" dividends. These are dividends "paid by a U.S. corporation or a qualified foreign corporation," according to the IRS. Research whether your stocks meet qualifying standards. If not, switch to stocks that do for a lower tax on stock dividends.

Tips & Warnings

• Non-sheltered investments may incur capital gains taxes when selling. Clarify with your brokerage house whether capital gains taxes will become due if you sell an investment.

• Annuities often have surrender charges and may have high internal fees. Ask about annuity fees and redemption features before investing.

References

• "The New Lower Tax On Dividends"; The Motley Fool
• Money 911; Jean Chatsky; 2010.
• "Qualified Dividends"; Internal Revenue Service.