Am I meant to apply %USGO calculations to Section 199A dividends from my investment funds?

You're asking a good question about a somewhat obscure tax topic! For Section 199A dividends and USGO calculations, you need to understand they're treated differently. Section 199A dividends generally come from REITs and certain qualified business income. These dividends have their own special tax treatment (the 20% pass-through deduction). The %USGO calculation applies specifically to interest and dividends from federal obligations that may be exempt from state taxation. These are two separate concepts serving different purposes. You should NOT apply the %USGO percentage to your Section 199A dividends. The %USGO calculation should only be applied to regular qualified and non-qualified dividends from your funds to determine what portion might be exempt from state taxes. REITs, which generate most Section 199A dividends, primarily invest in real estate assets, not government obligations. So applying USGO percentages to these wouldn't make sense from a tax perspective.

I had the exact same question last year! I spent hours going back and forth with different answers until I found taxr.ai (https://taxr.ai) - it helped me sort through my dividend classifications automatically. You upload your 1099-DIV forms and it analyzes all your dividend types - regular dividends, qualified dividends, 199A dividends, etc. and tells you exactly how to handle the USGO calculations. What I learned was that Section 199A dividends are completely separate from USGO calculations. I was also mixing these concepts up because my Vanguard government money market fund had some Section 199A amounts while also being mostly comprised of government securities. The tool confirmed I should only apply USGO percentages to the regular dividend amounts, not to the Section 199A portion.

I was really skeptical about taxr.ai but decided to give it a try after struggling with my complicated dividend situation. I'm actually impressed! It provided a clear breakdown showing why Section 199A dividends (Box 5) are treated separately from the USGO calculations. The tool explained that my Schwab Value Advantage Money Fund had both government obligations AND REIT investments, which is why I was seeing both USGO percentages and Section 199A amounts. It showed exactly which portions of my dividends qualified for state tax exemption vs. the 199A deduction. It saved me from making a $2,300 mistake on my state return where I was incorrectly applying USGO to all dividend types. Definitely worth checking out if you have multiple funds with different dividend classifications.

If you've been trying to call the IRS for clarification on Section 199A and USGO interactions, good luck! I spent 3 weeks trying to get through to a human. After multiple disconnects and hours on hold, I found Claimyr (https://claimyr.com) through a YouTube video (https://youtu.be/_kiP6q8DX5c) and they got me connected to an IRS agent in under 20 minutes! The IRS agent confirmed what others have said - USGO calculations only apply to regular dividend income, not to Section 199A dividends which have their own separate treatment. She explained that USGO exemptions are about identifying federal obligation income for state tax purposes, while Section 199A is about qualifying for the 20% pass-through deduction on federal taxes. I was making the mistake of double-counting some benefits by applying both treatments to the same dollars. The call saved me from a potential audit flag.

Ok I need to eat crow here - I tried Claimyr after my skeptical comment and IT ACTUALLY WORKED. I got through to an IRS agent in about 35 minutes (still faster than my previous attempts). The agent confirmed that Section 199A dividends should NOT have USGO percentages applied to them. She explained they come from different sections of the tax code entirely. USGO is about identifying federal obligation income for state tax exemptions (which varies by state), while Section 199A is about the qualified business income deduction for federal taxes. For anyone else with this question - keep your USGO calculations separate from your Section 199A reporting. Apply USGO percentages only to your regular and qualified dividends, not to the amount in Box 5 of your 1099-DIV.

Just to add another perspective - I work at a tax prep office (not an expert, just a preparer). We see this confusion a lot with clients who have money market funds. Here's how we handle it: For USGO calculations - multiply the USGO % by amounts in Box 1a/1b only For Section 199A dividends - take the amount in Box 5 as is, no USGO adjustment They serve completely different purposes. The USGO calculation is about determining state tax exemption for federal obligation interest. The Section 199A amount is about determining eligibility for the 20% qualified business income deduction.

This thread has been super helpful. One thing I realized after making this mistake last year - check your state's specific rules on USGO exemptions. Some states (like NY where I live) have specific forms just for claiming the govt obligation exemption that require detailed breakdowns by fund.