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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
Section 199A dividends can qualify for the qualified business income, or QBI, deduction, which may allow eligible taxpayers to deduct up to 20% of qualifying dividend income. These payments are generally associated with real estate investment trusts (REITs), and the deduction can reduce the amount of income subject to federal income tax. The deduction is available whether a taxpayer takes the standard deduction or itemizes.
For example, suppose an investor receives $5,000 of qualifying Section 199A dividends from REIT investments during the year. A 20% deduction could potentially reduce taxable income by $1,000, subject to the applicable Section 199A limitations. The dividend income itself is still reported on the tax return; the deduction is calculated separately and reduces taxable income rather than excluding the dividend entirely.
Not every REIT distribution qualifies. Generally, a qualified REIT dividend cannot be a capital gain dividend or a dividend already eligible for the preferential qualified-dividend tax rates. The investor must also generally hold the REIT shares for more than 45 days during the applicable 91-day period surrounding the ex-dividend date, and additional restrictions can apply when the investor’s risk of loss is reduced or there is an obligation to make related payments.
Investors can typically identify these payments on Form 1099-DIV. Section 199A dividends are reported in Box 5, and they can include qualifying REIT dividends received directly or passed through certain regulated investment companies, such as mutual funds or ETFs that hold REITs.
The deduction can also be limited by a taxpayer’s overall taxable income and other Section 199A rules. For 2026, the IRS lists QBI threshold amounts of $403,500 for married couples filing jointly and $201,750 for most other filers, with phase-in ranges above those amounts. Because the calculation can involve other qualified business income and publicly traded partnership income, investors with several types of Section 199A income may need to calculate the deduction using Form 8995 or Form 8995-A.
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
Section 199A dividends are generally associated with qualifying REIT distributions and may allow eligible investors to deduct up to 20% of that income through the qualified business income deduction. The deduction can reduce taxable income even for taxpayers who take the standard deduction, but holding-period requirements, income limits and other Section 199A rules may affect how much can be claimed. Reviewing Form 1099-DIV and the applicable QBI forms can help investors determine whether their dividends qualify and how the deduction should be calculated.
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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