Kenny Feng is president and CEO of Alerian.
Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


Discussion

John from Wisconsin posted over 2 years ago:

I've used an MLP investment as a place to store funds when I am not trading with a portion of my portfolio. I have experienced only positive results for the times I've used this strategy. Ownership has been limited to a two year tax period because of the extra forms required. Years I've used this:2001/2;2005/6; and 2010/2011. I do not use bonds in my trading account or ETFs.


Bedford from Tennessee posted over 2 years ago:

MLPs are the best income vehicles. Especially from a tax perspective.
Linn Energy Is a LLC not a MLP but it has the same advantages,


Roger from Texas posted over 2 years ago:

I have invested in MLPs in my taxable account since 2008. They provide a high level of current cashflow and many have raised their dividend rates frequently since my initial investment. Since most of the dividends are not taxable on a current basis, MLPs reduced my Fed Income Tax liabilities while I was working, and now that I am retired they reduce my Modified Adjusted Gross Income (MAGI) which is used to determine the adjustment to my Medicare premiums.


Thomas from California posted over 2 years ago:

Perhaps "John from Wisconsin" could elaborate on "the extra forms required"? My investing experience is quite limited.


Daniel from Wisconsin posted over 2 years ago:

is there any differences in tax reporting for llps versus mlp


F paul from California posted over 2 years ago:

Tax programs like Turbotax are a big help and make it very easy to fill out IRS Sch K1 forms.

Also MLPs provide guidance for doing this.


Len from Nebraska posted over 2 years ago:

maybe just me, but I thought this was confusing:
CR: If an investor buys the fund in a taxable account, when he sells it, he can actually use the distributions to reduce his basis?

KF: Right. Your basis comes down over time. You’re eventually going to pay the difference because it is tax-deferred, not tax-free. There is a deferral on that account, and you will end up paying taxes on that when you sell. It is this deferral mechanism that delays tax payments, which, thinking about the time value of money, benefits investors.

CR: What we’re talking about is actually reducing the taxable net profit reported to the IRS as a capital gain, correct?

KF: Right. In the current year.
CR seems to be under the impression that a reduction is basis is a good thing. It is not, it increases the capital gains that is subject to tax. So in the second question above, what we're talking about is actually increasing the taxable net profit reported to the IRS as capital gain. But the answer goes back to the effect on tax in the year a distribution is received not the effect on tax when the security is sold.
As a side issue, the fact that the gain can be permanently avoided if the security passes thru an estate or if the MLP is donated to a 501c3 should have been mentioned.


Bruce from North Dakota posted over 2 years ago:

When I sold units in 2 MLPs (in 2010) part of the gain was ordinary income. The K-1s had work sheets which told me how much was ordinary and how to calculate the capital gain. However, I had suspended losses (from the same MLPs) carried over and was able to use them to offset the ordinary gain on sale (have to be from same MLP). I am not a tax advisor or CPA. The IRS instructions are confusing on this offset provision: Some CPAs appear to have interpreted that you have to sell all units of a given MLP to be able to use any of the suspended losses from that MLP. It appears to me that if you had a situation where you sold all units in a MLP and the suspended losses exceeded the ordinary gain on the sale, then you could use the remaining loss against other ordinary income. TurboTax basic did not handle this for me (had to override).


Belle from Florida posted over 2 years ago:

I owned several MLPs--some for 5 or 6 years. I was overwhelmed with all the forms for reporting and sold the MLPs because I didin't like the filig mess. I made not only great interest (pass thru money) but also good capital gains as the MLPs kept going up in price. I'm thinking of trying again especially with something like AMLP


Thomas from Wisconsin posted over 2 years ago:

Could you or someone explain the result of holding AMLP in an IRA account, which I am doing now.


Dewey from Texas posted over 2 years ago:

AMLP can be held in a retirement account as they pay requisite taxes prior to distribution of earnings to account holders. This practice may reduce your overall earnings but enables IRA ownership. I too hold AMLP in a retirement account.


Andy from Colorado posted over 2 years ago:

Read
http://seekingalpha.com/instablog/462013-hinds-howard/232853-the-elusive-mlp-free-lunch-or-the-amlp-sucker-bet


Don from California posted over 2 years ago:

Do MLP fund investors who are holders of multiple MLPs through an MLP fund receive a stepped up basis for tax purposes at the death of the holder, and if so, is this true of both privately and publicly held MLP funds?


John from Arizona posted over 2 years ago:

If you hold several MLPs in an IRA and one reports a UBIT of $1100 and the other 2 report UBITs of -$500, can the totals be combined and avoid a taxable event?


William from Arizona posted over 2 years ago:

I am a big believer in pipeline mlp's. They pay about 7%, and are backed by an asset that holds it's value. Also they will, over time, follow inflation thus maintaining their value. The market value will however vary with the stock market; over time though you come out ahead over bonds.

I believe that the increased cap gain taxes due to decreasing cost basis are not passed on to heirs. The cost basis is reset to the time of death. This feature is valuable to the elderly wishing to preserve value for surviving children.

The decrease in cost basis is due to the fact that you deducted depreciation from the partnership income. Your cost basis is reduced by the amount of the depreciation taken over time. It is possible that all your initial purchase will be depreciated. In that case your cost basis would be zero. I think that at that time you would no longer be able to take an income reduction due to depreciation, and the taxes on the distributions would be increased. This is complicated by the fact that depreciation allowed by the tax code is intricate. One fact is that the taxes can be deferred continually by depreciation resulting from continual replacement of depreciable assets.

The seller of an mlp is given a formula by the partnership for computing taxes; you plug in numbers and get a tax value. It would take a lot of curiosity to try to understand what happened.

It is also true that the taxes on distributions derived from the K-1 are mysterious. The only practical thing to do is to use Turbo-Tax or equivalent. You will never untangle the "map" provided with the K-1.


Robert from Illinois posted over 2 years ago:

What are the metrics that can be used to predict which MLPs will increse their distributions in the future? This is important for anyone holding them for a long period of time.


Dave from Minnesota posted over 2 years ago:

Any capable accountant should be able to handle the tax reporting for any mlp. Plus the steady reliable income most of them provide is worth any extra tax prep effort. Most also come with easy to use directions and phone and online help for questions. Been using them now for a few years and have not had any problems. I think if you buy and hold them and collect the dividends thats great. If your going to use them to day trade, probably not such a good idea.


James from Wisconsin posted over 2 years ago:

Very good article, as well as discussion on tax implications. While I thought the information for the most part was very accurate, there are a couple of points I hold different opinions on. First as to MLPs receiving more "benign regulation" than utilities, I think this depends on the MLP. FERC has taken a much more aggresive stance in recent years, with several natural gas pipelines getting called in last year for "Section 5s" which are cases to consider if rates of return have been too high. They also tend to have large customers (producers, utilities) with the resources to challenge them if rates seem too high. A second item is that some MLPs that are midstream operators still have a fair amount of exposure to commodity prices, albeit not to the extent that E&P companies do. The exposure is typically from processing and refining. An example is that processing liquids from the natural gas stream is very profitable right now as the liquids prices track oil more than natural gas and the current spread between natural gas and oil is historically very high. There is no guaranty that this spread will hold. All this is not to say that MLPs are not great investments as I feel energy infrastructure in the US will be bullish for years to come. Howvever the MLP revenue mechanisms do get complicated, which is why I personally tend to favor MLPs with a proven track record. Regardless, thanks for the timely article about an asset class where earnings tend to hold up well even in an economic downturn.


Margaret from Colorado posted over 2 years ago:

I may have read all the comments above too quickly but for me the main problem with MLPs is not the K-1 report for federal taxes but the unexpected "surprise" of the non-resident state taxes you may need to report and pay. I find a search of the web sites of the various MLPs BEFORE investing are virutually silent as to what to expect when they send you the K-1 and accompanied exhibits. Seeking cousel of a tax advisors is expenseive!! Marg


Margaret from Colorado posted over 2 years ago:

I may have read all the comments above too quickly but for me the main problem with MLPs is not the K-1 report for federal taxes but the unexpected "surprise" of the non-resident state taxes you may need to report and pay. I find a search of the web sites of the various MLPs BEFORE investing are virutually silent as to what to expect when they send you the K-1 and accompanied exhibits. Seeking cousel of a tax advisors is expenseive!! Marg


John c from Illinois posted over 2 years ago:

The NAV of AMLP seems to consistently trail its index by 35 per cent the difference being the corporate tax rate paid as AMLP is actually a corporation and taxed as such.
The distributions of capital reduce the basis so the taxable gain is greater when sold unless inherited. There is a benefit from deferral but there is legislative risk from a change in tax code. Nevertheless the paperwork is less and the income return is steady. I would buy the stock if Mr Feng can confirm my understanding of the tax situation.


Terry from Florida posted over 2 years ago:

I have held & increased my holdings in LINE (Linn Energy) for the past 3-4 years. It seems to have been a great investment, delivering consistent distributions, with good appreciation over time. My effective yield is probably 8-9% or more !!!


Carol from Arkansas posted over 2 years ago:

I have invested in several MLP'S over the years. They are just like stocks in that there are good and bad ones. i like the pipelines but they
are pretty expensive right now.


J from Pennsylvania posted over 2 years ago:

I started helping my parents prepare their income tax for their accountant. We found that he charges extra fees to calculate all the MLP's they had in their portfolio. The accountant informed them the size of their investments in each MLP was on the small size to make such investments profitable considering the extra charges. They were all less than $25,000. each. Something to check with your accountant.


Joe from New Jersey posted over 2 years ago:

I haven't had these tax problems, I guess because my MLP's are in a ROTH IRA???


Lester Smith from Michigan posted about 1 year ago:

Mlps are complex investments. It appears that AMLP has more advantages than most other MLPS and warrents more consideration for investment in most types of accounts.


B R from Mississippi posted about 1 year ago:

I have done well with BPT over the years since 1993. Tax filing seems straight forward to me unless I'm missing something. The ultimate risk is when the well runs dry; otherwise, just the market price of oil. It will usually follow the price of oil; however, a few months ago, some goonie suggested that BP was going to quit paying the trust and Jim Cramer made a comment to sell into strength and guess what BPT dropped about 15% without merit in my opinon. Cramer and goonie do not know everything. Still holding on to BPT for the long haul.


Leon Taterus from Pennsylvania posted about 1 year ago:

RE MLP TAX CONSIDERATIONS; YES IT CAN BE VEXING, BUT MY BROKERAGE FIRM, SCHWAB, REQUESTS I SEND THEM MY K-1s(WHICH USUALLY SHOW UP NEAR TAX FILING DEADLINE DATE). THEY THEN CALCULATE MY MLP TAXABLE REQUIREMENTS, AND IF NEED BE, THEY PAY IT OUT OF THE CASH IN MY ACCT.


Leon Taterus from Pennsylvania posted about 1 year ago:

RE MLP TAX CONSIDERATIONS; YES IT CAN BE VEXING, BUT MY BROKERAGE FIRM, SCHWAB, REQUESTS I SEND THEM MY K-1s(WHICH USUALLY SHOW UP NEAR TAX FILING DEADLINE DATE). THEY THEN CALCULATE MY MLP TAXABLE REQUIREMENTS, AND IF NEED BE, THEY PAY IT OUT OF THE CASH IN MY ACCT.


Ron Rappold from Florida posted about 1 year ago:

If you hold mlp's in a roth does it eliminate all the tax reporting.


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