Section 199A dividends are distributions from the profits of domestic real estate investment trusts (REITs) that qualify for a special 20% tax deduction. Investing in Section 199A dividends can provide a valuable tax deduction for investors, and income limits don’t apply to Section 199A income from REITS. Understanding the ins and outs of this tax break requires some study, but the effort can produce useful information to guide investing activities. Consulting with a financial advisor can help you determine whether investments like REITs and their Section 199A dividends fit into your overall financial plan.
Section 199A Dividend Background
Section 199A dividends get their name from Section 199A of the tax code. This section was created by the 2017 Tax Cuts and Jobs Act to provide a tax deduction for pass-through business income. One element of Section 199A is that it allows a 20% deduction for dividends paid out from the profits of domestic REITs.
When you receive Section 199A dividends, they will be reported on Form 1099-DIV in Box 5. These dividends are a subset of the total ordinary dividends reported in Box 1a. You don’t need to itemize deductions to qualify for the 199A deduction. The deduction does not reduce your adjusted gross income.
Section 199A Dividend Tax Deductions
The tax deduction for Section 199A dividends is generally 20% of the amount reported in Box 5 of 1099-DIV. This percentage deduction is not phased out at higher income levels like it is for some other sources of qualified business income (QBI), such as profits from self-employment. Taxpayers at any income level can take the full 20% deduction for their Section 199A dividends.
The Section 199A deduction for dividends is claimed on Form 8995 or Form 8995-A and then flows through to Line 13 of your Form 1040. This deduction does not lower your marginal tax bracket or income-based phaseouts on things like Roth IRA contributions. But it does directly lower your taxable income.
Section 199A Dividend Deduction in Action
Here’s a hypothetical example of how a typical taxpayer who invests in domestic REITs might use the Section 199A dividend deduction:
This investor earns $50,000 in W-2 income from his job. He also gets $5,000 in ordinary dividends from a mutual fund that includes domestic REITs in its portfolio. His Form 1099-DIV shows $3,000 of that amount as Section 199A dividends in Box 5. Only part of the $5,000 in ordinary dividends is classified as Section 199A dividends in this example because the other components of the mutual fund’s portfolio are not REITs. In this case, his Section 199A deduction would be the lesser of:
- 20% of $3,000 Section 199A dividends = $600 or
- 20% of his taxable income = 20% x ($50,000 + $5,000 – $12,950 standard deduction for 2023) = $8,230
The investor in this example could claim a $600 Section 199A deduction. That’s 20% of his $3,000 in Section 199A dividends.
Section 199A Dividends for Investors
For investors, the main advantage of Section 199A dividends is the tax deduction without income limits. The tradeoff is that ordinary REIT dividends don’t qualify for the lower qualified dividend tax rates like corporate stock dividends might.
Investors will generally find Section 199A dividends within mutual funds or ETFs holding REIT stocks. Individual REIT stocks also may pay Section 199A dividends. The presence of this potential deduction can be a significant factor to consider when selecting REIT investments.
Limitations of the Section 199A Dividend Deduction
While the 199A deduction for dividends has some attractive features, including that it lacks income phaseouts, it comes with limitations. Here are some to keep in mind:
- It doesn’t reduce your adjusted gross income or marginal tax bracket.
- It expires at the end of 2025 unless Congress extends Section 199A.
- The dividends themselves are taxed as ordinary income, not at the lower qualified dividend rate.
- The deduction only applies to dividends attributable to domestic REIT ownership.
Bottom Line
The Section 199A dividend deduction can directly lower tax bills for REIT investors. Taxpayers can claim the deduction even if they don’t itemize, although it doesn’t lower adjusted gross income and can’t move them to a lower tax bracket. The deduction may not last forever and can be tricky, but the opportunity to save on taxes can make learning about it and using it a worthwhile exercise.
Tips for Tax Planning
- Meeting with a financial advisor can help identify the best tax savings opportunities for your situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you canhave a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Forecast your future tax bill with SmartAsset’s federal income tax calculator.
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FAQs
Section 199A dividends are distributions from the profits of domestic real estate investment trusts (REITs) that qualify for a special 20% tax deduction. Investing in Section 199A dividends can provide a valuable tax deduction for investors, and income limits don't apply to Section 199A income from REITS.
Do I have to report section 199A dividends? ›
One element of Section 199A is that it allows a 20% deduction for dividends paid out from the profits of domestic REITs. When you receive Section 199A dividends, they will be reported on Form 1099-DIV in Box 5. These dividends are a subset of the total ordinary dividends reported in Box 1a.
What is Section 199A in simple terms? ›
IRC Section 199A allows individuals, trusts, and estates with pass-through business income to deduct up to 20% of qualified business income (QBI) from taxable ordinary income.
What is the 199A dividend holding period? ›
To be eligible for deduction under Section 199A, a shareholder must have held shares on which the dividend was paid for at least 46 days during the 91-day period that began 45 days before the fund's ex-dividend date (ex-date).
How do I enter 199A dividends on TurboTax? ›
Only enter amounts from your Section 199A Statement, not any of the other boxes on the K-1 form. When you check the box next to a line, an additional box will open where you can enter the amount from your Section 199A Statement for that line.
What qualifies for a 199A deduction? ›
Any US sole proprietorship, partnership, S corporation, trust, or estate can qualify for the Section 199A deduction. What is qualified business income? Qualified business income (QBI) is the net income your business yields after subtracting expenses and payroll.
Who is excluded from 199A? ›
Income earned by a C corporation or by providing services as an employee is not eligible for the deduction regardless of the taxpayer's taxable income. In some cases, patrons of agricultural or horticultural cooperatives are required to reduce their deduction under section 199A(b)(7) (patron reduction).
Why was Section 199A created? ›
To establish parity between the tax treatment of corporate and noncorporate (or pass-through) business profits, the TCJA also lowered individual income tax rates (except for the lowest rate of 10%) and created a new deduction under Internal Revenue Code Section 199A for pass-through business profits.
Where is the 199A deduction taken on form 1040? ›
Explanation: The tax cut and jobs act added a section 199a deduction for pass through entities. It is calculated on form 8995. It is then carried forward to form 1040 on line 10 as a deduction from adjusted gross income (AGI).
What property qualifies for Ubia? ›
Commonly, qualified property is any tangible property that is used in the trade or business and for which a depreciation deduction can be claimed. The depreciable period ends on the later of 10 years after the property is first placed in service.
You declare the dividends in the tax year that you receive them. Dividends paid by your company Feb to Feb, should be declared in the tax year that you received them. Eg. Feb 2020 to Feb 2021 should be declared in 2020 to 2021 Tax return.
How many months should I hold a stock to get dividend? ›
How Long Do I Need to Own a Stock to Collect the Dividend? To collect a stock's dividend you must own the stock at least two days before the record date and hold the shares until the ex-date.
What is the 90 day rule for dividends? ›
Mutual funds
For certain preferred stock, the security must be held for 91 days out of the 181-day period, beginning 90 days before the ex-dividend date. The amount received by the fund from that dividend-generating security must have been subsequently distributed to you.
How do I report section 199A dividends on my taxes? ›
The Section 199A deduction for dividends is claimed on Form 8995 or Form 8995-A and then flows through to Line 13 of your Form 1040. This deduction does not lower your marginal tax bracket or income-based phaseouts on things like Roth IRA contributions. But it does directly lower your taxable income.
How do I claim dividends on my taxes? ›
To report your dividends on your tax return and pay the applicable taxes, you include the appropriate amounts on Form 1040 and fill out the related line items on Schedule B if required. TurboTax can fill out the proper forms for you by asking questions about dividends you receive throughout the tax year.
Do I have to report 1099-DIV on my tax return? ›
If you receive $10 or more in dividends, you will receive a Form 1099-DIV. This form shows the dividends you received, any taxes withheld, non-dividend distributions, capital gains distributions, investment expenses, and certain other types of gains. You will need to report this income on your tax return.
Do all dividends need to be reported to IRS? ›
If you had over $1,500 of ordinary dividends or you received ordinary dividends in your name that actually belong to someone else, you must file Schedule B (Form 1040), Interest and Ordinary Dividends. Please refer to the Instructions for Form 1040-NR for specific reporting information when filing Form 1040-NR.
Where do I report 199A dividends on 1120s? ›
At the Schedule K – Distributive Share Items > Other Menu, all of Section 199A information that will be distributed to the shareholders on their respective individual Schedule K-1 would be entered.
What happens if you don't report dividend income? ›
If you don't, you may be subject to a penalty and/or backup withholding. For more information on backup withholding, refer to Topic no. 307. If you receive over $1,500 of taxable ordinary dividends, you must report these dividends on Schedule B (Form 1040), Interest and Ordinary Dividends.
