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Reporting Dividends on Your Tax Return

Dividends are a common form of income for investors, but they come with tax obligations that must be reported correctly on your tax return. The Internal Revenue Service (IRS) requires that you declare dividend income directly on your Form 1040. Specifically, lines 3a and 3b are designated for reporting qualified and non-qualified dividends, respectively.

The information you need to fill out these sections comes from Form 1099-DIV, which financial institutions are required to send to you by January 31 of the following tax year.

These forms detail the dividends you earned over the year. Note that even if your total dividends are under $10 and you don’t receive a 1099-DIV, you are still required to report this income on your tax return.

If your non-qualified dividends exceed $1,500, you will need to complete Schedule B, which provides additional details about your dividend income. This form must be attached to your Form 1040.

For some investors, dividends might also be reported on Schedule K-1. This form applies to those receiving income from trusts, estates, partnerships, LLCs, or S corporations. Additionally, certain funds or exchange-traded funds (ETFs) that function as partnerships might issue Schedule K-1s to their investors. However, even if you receive a Schedule K-1, you will also get a 1099-DIV summarizing your dividend earnings for tax purposes.

Timing and Receipt of Tax Forms

By law, financial institutions must send 1099-DIV forms by January 31. However, if you rely on electronic delivery, the forms may become accessible a day or two later.

For those receiving forms by mail, it might take several weeks to arrive. To avoid delays in filing your taxes, ensure you collect all necessary forms before starting your tax return preparation.

How Much is the Tax?

We talked about dividend taxes in the previous issue. Please check it for more on tax rates and potential taxes.

Minimizing Dividend Taxes with Retirement Accounts

We understand taxes are too high and you need ways to reduce your tax burden. One effective strategy to reduce or eliminate taxes on dividends is to hold dividend-earning investments in tax-advantaged retirement accounts. Popular options include a 401(k) or a Roth IRA.

  • 401(k): Contributions are made with pre-tax income, and the funds grow tax-deferred until you withdraw them in retirement, at which point they are subject to income tax.

  • Roth IRA: Contributions are made with post-tax income. While you don’t receive a tax deduction for your contributions, the dividends and other earnings grow tax-free, and withdrawals during retirement are also tax-free.

By holding dividend-producing assets in these accounts, you can let your investments grow without immediate tax consequences, maximizing your long-term returns.

Other Ways to Reduce Taxes

You can also use other strategies to reduce your dividend tax:

  • Invest in Qualified Dividends: Qualified dividends are taxed at lower capital gains rates (0%, 15%, or 20%) instead of regular income tax rates.

  • Stay in the 0% Capital Gains Bracket: If your taxable income is below $44,625 (single) or $89,250 (married filing jointly) in 2024, your qualified dividends are tax-free.

  • Use Tax-Loss Harvesting: Sell losing investments to offset taxable dividend income and capital gains.

  • Invest in ETFs Instead of Mutual Funds: ETFs often have lower capital gains distributions, reducing tax exposure.

  • Move to a Tax-Free State: Some states (e.g., Florida, Texas, Nevada) do not tax dividends at the state level.

Conclusion

Dividends can be an excellent source of supplementary income, particularly during retirement, but they come with tax obligations that vary based on whether they are qualified or non-qualified.

Proper reporting ensures compliance with tax laws and helps avoid penalties. Utilizing tax-advantaged retirement accounts to hold dividend-producing investments is a smart way to minimize tax liability and grow wealth over time. For tailored advice, consider consulting a financial advisor who can align your investment and tax strategies with your financial goals.

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.