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.
What is Section 199A for dummies? ›
Section 199A is a qualified business income (QBI) deduction. With this deduction, select domestic businesses can deduct roughly 20% of their QBI, along with 20% of their publicly traded partnership income (PTP) and real estate investment trust (REIT) income. The deduction is limited to 20% of taxable income.
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.
How to calculate Section 199A information? ›
See Section 199A Qualified Business Income (QBI) Deduction. The 199A qualified business income deduction, also known as the “pass-though deduction,” is the lesser of: 20% of the excess (if any) of taxable income over net capital gain, or. combined qualified business income.
What does not qualify for 199A? ›
If a business qualifies as an SSTB, it can't take advantage of the Section 199A deduction. But if a business only earns some income through SSTB activities, like consulting, it may still qualify for the deduction. If its income is below the threshold, they can still get the deduction.
What qualifies as a qualified dividend? ›
To be a qualified dividend, the payout must be made by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.
Do I have to report 199A dividends? ›
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.
Where do I put section 199A dividends on my tax return? ›
As Section 199A dividends are a component of Box 1a total ordinary dividends, they are thus reported on the Form 1040 on Line 3b.
How to calculate ubia? ›
How Is The UBIA Calculated? The UBIA of qualified property generally equals the cost of tangible property subject to depreciation.
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.
Ordinary dividends are taxed as ordinary income at your regular tax rate, while qualified dividends are taxed at a lower rate, similar to the long-term capital gains tax rate. To qualify for the lower tax rate on qualified dividends, the dividends must meet certain criteria set by the IRS.
What does Section 199A look like? ›
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.
How do I maximize my 199A deduction? ›
The magic number is 28.571%. So long as a qualified trade or business owner pays himself or herself a salary (or pays combined salaries to multiple employees) equal to 28.571% of the business' QBI (calculated without taking into account salaries), the highest possible Section 199A deduction will be available.
How do I enter Section 199A Information Box 20 Code Z? ›
Enter IRS form K-1 (1065) information at the screen Enter Box 20 info,
- Select code Z Section 199A information. ...
- Click Continue.
- At the screen We need some information about your 199A income, you will likely enter the following information:
- Ordinary business income (loss) from this business, and/or.
- Rental income (loss).
Essentially, the way to determine whether or not a taxpayer qualifies for this deduction is to determine whether or not their business meets a few criteria: Their income does not exceed $157,500 for a single filer or $315,000 for a married couple filing jointly. They are not an employee of the business.
Do I have to claim Section 199A dividends? ›
Section 199A dividends create a taxpayer favorable federal income tax deduction. They are reported in Box 5 of Form 1099-DIV and should be reported on a taxpayer's federal income tax return.
What is the difference between qualified and nonqualified dividends? ›
Qualified dividend: Taxed at the long-term capital gains rate, which is 0%, 15% or 20%, depending on an investor's income level. Nonqualified or ordinary dividend: Taxed at an investor's ordinary income tax rate, which can range between 10% and 37%, depending on income level.
Are qualified REIT dividends the same as Section 199A dividends? ›
In exchange for paying 90 plus percent of its income out to investors as dividends, the REIT itself does not pay federal corporate income taxes. This results in REITs often paying higher dividends than companies in other industries. The dividends paid by the REIT are Section 199A dividends.
