What Are Section 199A Dividends?

When it comes to maximizing investment income, few tax benefits are as overlooked, or as valuable, as the Section 199A dividend deduction. This special provision allows certain investors to deduct up to 20% of qualified dividends from their taxable income, potentially saving thousands in taxes each year. For those who invest in real estate investment trusts or publicly traded partnerships, it’s a powerful way to keep more of what they earn.

A financial advisor can help you determine whether investments like REITs and their Section 199A dividends can 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.

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Section 199A Dividends for Investors

Section 199A dividends, also known as qualified business income (QBI) dividends, are a special type of income that allows certain investors to take advantage of a significant tax deduction. These dividends typically come from real estate investment trusts (REITs) and publicly traded partnerships (PTPs), and they qualify for up to a 20% federal tax deduction under the Tax Cuts and Jobs Act of 2017.

Unlike qualified dividends, Section 199A dividends are not eligible for the lower qualified dividend tax rate. Instead, they’re taxed at your ordinary income rate, but the 20% deduction helps offset that difference, effectively reducing your overall tax burden. This makes them an appealing option for income-focused investors looking to boost after-tax returns.

To take advantage of this deduction, Section 199A dividends must be clearly reported on your Form 1099-DIV in Box 5. The deduction is typically claimed on your individual tax return (Form 1040), even if you don’t itemize. While this tax break can make REITs and similar investments more attractive, it’s important to understand that not all dividends qualify, and the rules can be complex.

Limitations of the Section 199A Dividend Deduction

While the Section 199A dividend deduction can provide a valuable tax break, it comes with several important limitations that investors need to understand. Not all dividends qualify, and even those that do are subject to income thresholds, filing requirements and other restrictions that can reduce or eliminate the deduction for higher earners.

One of the primary limitations is income eligibility. The full 20% deduction begins to phase out once a taxpayer’s income exceeds certain thresholds, $201,775 for single filers and $403,500 for joint filers in 2026 (adjusted annually for inflation). Once you’re above those limits, the deduction may be partially reduced or unavailable, depending on your total taxable income and the nature of your investments.

Additionally, not all dividends qualify for the deduction. Only dividends classified as Section 199A dividends, typically from REITs or certain publicly traded partnerships, are eligible. Ordinary dividends from stocks, mutual funds or ETFs that don’t invest in these entities don’t qualify for the 20% deduction.

Another limitation involves the temporary nature of the law. The Section 199A deduction is scheduled to expire after 2025 unless Congress extends it. That means investors relying on this benefit should be aware that it may not be available in future tax years.

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 vetted financial advisors who serve your area, and you can have 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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