Section 199A dividends are a specific type of dividend income that may may have access to for a tax deduction under federal law

Section 199A dividends are dividends paid by certain domestic corporations that have already had corporate tax paid on them. The key feature is that you may be able to deduct up to 20 percent of the dividend income on your personal tax return, subject to income limits and other conditions. This deduction is separate from the dividend itself — you report the full dividend amount as income, then claim the deduction as an adjustment.

The deduction applies only to "may have access to dividends" from domestic corporations. Not all dividends may have access to. Dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and certain other entities do not may have access to for the Section 199A deduction, even though they may be taxed at preferential rates under other rules.

Key Takeaways

  • Section 199A allows you to deduct up to 20 percent of may have access to dividend income on your federal tax return, reducing your taxable income.
  • The deduction phases out if your taxable income exceeds $182,100 (single filers) or $364,200 (married filing jointly) for the 2023 tax year, with different thresholds each year.
  • Dividends from REITs, master limited partnerships, and certain other pass-through entities do not may have access to for the Section 199A deduction.
  • You must report the full dividend amount on your return; the deduction is claimed separately on Schedule 3 or through your tax software.
  • The Section 199A deduction is set to expire after December 31, 2025, unless Congress extends it.

How the 20 percent deduction works

When you receive a may have access to dividend, you report it as ordinary income on your tax return. Then, on Schedule 3 (Form 1040) or through your tax software, you claim a deduction equal to 20 percent of that dividend income. This deduction reduces your taxable income, which in turn reduces the tax you owe.

The deduction is not a credit — it does not reduce your tax dollar-for-dollar. Instead, it reduces the income that is subject to tax. If you are in the 24 percent tax bracket, a 20 percent deduction on a $1,000 dividend saves you roughly $48 in tax (20 percent of $1,000 equals $200 in deductible income; $200 times 24 percent equals $48). The actual benefit depends on your tax bracket.

You cannot deduct more than 20 percent of your may have access to dividend income, and the total deduction cannot exceed 20 percent of your taxable income for the year (with some exceptions for certain business structures). Most individual investors do not hit this second limit, but it matters if you have very high dividend income or operate a business.

Income limits that reduce or eliminate the deduction

The Section 199A deduction begins to phase out once your taxable income exceeds a threshold amount. For the 2023 tax year, the threshold is $182,100 for single filers and $364,200 for married couples filing jointly. These thresholds adjust each year for inflation.

Once your income exceeds the threshold, the deduction phases out gradually. You do not lose it all at once. The phase-out is complex and depends on your filing status and the type of income you receive. If your income is only slightly above the threshold, you may still claim most of the deduction. If your income is significantly higher, the deduction shrinks or disappears entirely.

The phase-out rules are one reason to work with a tax professional if you have substantial dividend income. The calculation involves multiple steps and can interact with other deductions and credits on your return.

Which dividends may have access to and which do not

Dividends from most domestic corporations may have access to for the Section 199A deduction. This includes dividends from stocks you own in large public companies, smaller corporations, and mutual funds that hold domestic corporate stock.

Dividends that do not may have access to include those from REITs, master limited partnerships (MLPs), and certain other pass-through entities. Dividends from foreign corporations also do not may have access to, even if the company is large and well-known. Dividends paid by S corporations and partnerships to their owners are handled differently and may not may have access to either, depending on the structure.

Your brokerage or mutual fund company will report which dividends are may have access to and which are not on your year-end tax statement (Form 1099-DIV). The statement breaks down may have access to dividends separately from non-may have access to dividends, so you do not have to research each holding yourself.

Reporting the deduction on your tax return

You report may have access to dividends on Schedule B (Form 1040) or directly on Form 1040 if you use tax software. The form asks you to list the total amount of may have access to dividends you received during the year. Your brokerage statement will provide this figure.

The Section 199A deduction itself is claimed on Schedule 3 (Form 1040) or through the corresponding section in tax software. You calculate 20 percent of your may have access to dividend income (subject to the income limits and other rules) and enter that amount as a deduction. Most tax software walks you through this calculation automatically once you enter your dividend income.

If you use a tax professional to prepare your return, they will handle this calculation for you. If you prepare your own return, make sure your software or instructions account for the phase-out rules if your income is near or above the threshold.

The expiration date and what happens after 2025

The Section 199A deduction is scheduled to expire on December 31, 2025. After that date, unless Congress extends or makes the provision permanent, you will no longer be able to claim this deduction on your federal tax return.

Congress has extended this deduction before, and it may do so again. However, you should not assume an extension will happen. If you are planning your investments or tax strategy for 2024 and 2025, it is worth keeping this date in mind. Tax laws can change, and an extension or change could affect your tax liability in future years.

How Section 199A dividends differ from other dividend tax treatment

may have access to dividends (the same dividends that may may have access to for the Section 199A deduction) are also taxed at preferential rates — 0 percent, 15 percent, or 20 percent depending on your income level — rather than at your ordinary income tax rate. This is a separate benefit from the Section 199A deduction and applies regardless of whether you claim the deduction.

Non-may have access to dividends are taxed as ordinary income at your regular tax rate, which can be as high as 37 percent. The difference between 15 percent and 37 percent is substantial, so knowing whether your dividends are may have access to matters for your overall tax bill.

The Section 199A deduction is an additional benefit on top of the preferential tax rate. You get both the lower rate and the deduction, which is why may have access to dividends from domestic corporations receive favorable tax treatment compared to other types of income.

Frequently Asked Questions

Do I have to claim the Section 199A deduction if I receive may have access to dividends?

No. The deduction is optional. However, it almost always reduces your tax bill, so there is no reason not to claim it if you are may have access to to it. Your tax software or preparer will claim it automatically unless you specifically ask them not to.

What if my dividend income is below the income threshold?

If your taxable income is below the threshold for your filing status, you can claim the full 20 percent deduction on your may have access to dividends with no phase-out. The threshold is $182,100 (single) or $364,200 (married filing jointly) for 2023, adjusted annually for inflation.

Can I claim the Section 199A deduction on dividends from a mutual fund?

Yes, if the mutual fund holds domestic corporate stocks and distributes may have access to dividends. Your mutual fund statement will tell you how much of your dividend distribution is may have access to. Non-may have access to distributions and distributions from funds holding REITs or foreign stocks do not may have access to.

What happens to the Section 199A deduction after 2025?

The deduction expires on December 31, 2025, unless Congress extends it. You should not assume an extension will happen when planning your taxes. If you want to know the current status, check the IRS website or speak with a tax professional closer to that date.

Is the Section 199A deduction the same as the preferential tax rate for may have access to dividends?

No, they are separate. may have access to dividends are taxed at preferential rates (0, 15, or 20 percent) based on your income. The Section 199A deduction lets you deduct an additional 20 percent of that income. You receive both benefits if you may have access to for both.