Receiving notice that your taxes are getting audited is a stressful experience for individuals and business owners. The IRS conducted over 700,000 tax audits in 2022. One of the best ways to avoid an audit when filing taxes is by knowing how to report all types of income.
Knowing the different types of dividends is an excellent start, but many investors struggle to learn where to report section 199a dividends. Learning the basics will save you time, energy, frustration, and money. It’s an excellent way to enjoy a stress-free tax season.
Hiring a tax specialist is a fantastic option when preparing your taxes, but learning about reporting dividends will help you save money and file alone. Luckily, you’re in the perfect place to learn more about 199a dividends and where to report them when filing. Continue reading to avoid costly audits today!
What Are 199a Dividends?
The Section 199a dividends received their name from Section 199a of the IRS’s tax code. It was passed in 2017 when the US Congress passed the Tax Cuts and Jobs Act. The purpose is to provide more pass-through income to businesses.
One of the critical elements of the act is the 20 percent deduction it provides to specific investors. You can deduct 20 percent of your earnings when you invest in domestic real estate investment trusts.
You’ll want to report your dividends in the Section 5 box on your Form-1099-DIV document. A tax specialist will guide you through the process to ensure a smooth tax season. They’re a subset of the other types of dividends you’ll report in Box 1a.
It’s worth noting that your Section 199a dividends do not offset your adjusted gross income. Still, it’s an excellent way for investors to save money when filing taxes.
Section 199a Dividend Tax Deductions
In addition to learning where to report Section 199a dividends, it’s also worth noting the tax deductions you qualify for. The general rule is deducting 20 percent of your income from domestic REITs.
It’s different from other types of income on your taxes since it’s not affected by the amount of money you’ve made and the tax bracket you’re part of. Your 199a dividend is safe from taxation, while self-employed income is not.
Who Pays Section 199a Dividends?
Individuals who own shares in real estate investment funds must report income through dividends from these investments. It’s a unique type of investment, making filing taxes more challenging.
It’s an investment entirely focused on real estate. Investors can purchase a single stock from a REIT or mutual fund comprising all real estate investments.
They’re an excellent investment if you want an advantage through the IRS’s tax code. Ninety percent of income from REITs is dispersed to investors through dividends. It’s one of the best investment opportunities to grow wealth through dividends.
Where to Report Section 199a Dividends
There are three places to note when reporting dividends from Section 199a on your tax return. The first place to write your earnings is Box 1a on your Form 1040. They are categorized as ordinary dividends and must be reported on Line 3b of Form 1040.
It’s vital to note that your Section 199a dividends are not qualified dividends. Avoid reporting them on Line 3a to ensure an accurate filing. You can also refer here for patronage dividends.
The next place to report your dividends is Line 6 of Form 8995 or Line 28 of Form 8995-A. It’s the best approach when filing taxes with tax preparation software.
When filing, you’ll also want to claim your earnings from dividends on Line 13 of your Form 1040. It’s the best approach for an accurate tax filing when April arrives.
Tips for Hiring a Tax Specialist
Hiring a tax specialist is the way to go if you’re new to filing taxes with dividends and other investments. The process gets confusing quickly, but a tax specialist will guide you and provide the knowledge to file alone in the future.
It’s worth researching when seeking a tax specialist or accountant to assist with reporting dividends. The wrong hire could result in a costly and unpleasant experience, ending in an audit from the IRS.
Here’s a look at the tips you should use to ensure you get the help you need when learning where to report Section 199a dividends.
1. Check the Credentials
Credentials will tell you much about what to expect when hiring a tax specialist to help you prepare and file your taxes. It’s simple for individuals to claim they’re tax experts, but credentials add credibility to those claims. Checking the credentials is the best way to avoid getting duped.
You can ensure you’re working with a tax specialist with the experience and education to help you save money and avoid audits. Search engines are an effective way to find experienced and reputable tax preparers near you.
2. Check the Professional Records
Professional records are also beneficial when getting insight into the tax preparer’s career. You’re granting the preparer access to your financial information and Social Security Number. It’s best to find a tax preparer in which you can put total faith.
A qualified tax specialist is an excellent start, but qualification doesn’t equate to trust. Combining credentials with a solid professional reputation is ideal for finding help when filing your taxes in April.
The tax specialist’s current licenses are also beneficial when narrowing your options. You can discover disciplinary measures taken against them for past actions. Punitive measures are a notable red flag you shouldn’t ignore when comparing your options and learning where to report Section 199a dividends.
3. Prioritize Questions
The best tax preparers ask plenty of questions during consultations. If you’re attending a tax preparation consultation, note whether the preparer asks questions about your finances.
A tax specialist who asks questions should give you confidence that they know what they’re doing. It’s also beneficial because it demonstrates that you’ve found a tax preparer who wants to help you. Their expertise could save you thousands of dollars when tax season arrives.
4. Consider the Cost
The cost is a significant factor when narrowing your tax preparation options. Ask about the cost structure when meeting with the accountant for your consultation. Knowing the total cost of tax prep services will give you the whole picture of the value you’ll receive for your hard-earned cash.
Breakdowns are helpful because they show you each part of the service you’re paying for. It’s also beneficial to ask about pricing models. Some tax preparers work for an hourly rate, and others charge per tax return.
The best tax specialists are transparent about all fees. Consider other options if the tax preparer you’re considering is unwilling to disclose their pricing.
The primary factors that determine the final cost are complexity, number, and where you live. It’s best to understand all the expenses you’ll face when hiring someone to file your taxes. When seeking an expert to file your taxes, you deserve to know what you’ll pay.
5. Seek Knowledge
Work and learning for tax specialists never ends. The tax code in the United States constantly changes, which doesn’t account for state and local codes and regulations. It’s a lot for one person to memorize, but the best tax preparers stay on top of the changes.
Paying full price for a tax expert with outdated information wastes hard-earned money-research to determine if your favorite tax preparation service has followed the changes in tax law.
A preparer without this information will lose out on deductions and credits you qualify for. They’ll also make notable errors when filing your taxes. The mistakes could lead to an IRS audit and hefty penalties.
6. Ask About E-Filing
The traditional option of filing your taxes through the mail is effective, but technology has pushed the bounds of filing taxes for millions of people in the US. Finding a tax preparation service that provides an e-filing option saves significant time and stress.
You won’t need to ensure you drop your taxes off at the post office by a specific date. The tax preparer will help you file online and set up a direct deposit for your tax return into your bank account.
7. Know and Avoid Red Flags
Before choosing your tax specialist, look for red flags and warning signs. Tax preparers can’t charge a fee based on the money you pay in taxes during the year. It’s a direct violation of the tax preparation code.
It’s also a red flag if the tax preparer compiles your return without requesting more documentation. Choosing to proceed is against the law. Tax return promises are another sign to look elsewhere for tax help.
Now You’re Prepared for Tax Season
Learning the basics of filing taxes and knowing where to report Section 199a dividends is an excellent way to avoid an audit from the IRS and save more money during tax season. The best place to report dividends is the Section 5 box on your Form-1099-DIV. You can also report your earnings on Line 6 of Form 8995.
Tax season is a source of stress and sleepless nights for many. Take control of your finances with our Finance guides and articles today!