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KitKat's thread dredges up a category that I've had trouble with in the past. There's been a load of MLPs, mostly pipelines and energy related, but a few others over the years, that I've been interested in... but the tax issue scares me off every time.

Specifically... the potential for owing (and far more importantly, having to file a return for) state income tax in every state where an MLP has assets. How do I look at an MLP and a.) understand how much income will potentially be applicable to each state and b.) anybody aware of a one-stop-shop that will help me understand on a state-by-state basis what would trigger the requirement to file a return, or do I have to go plow through state.gov websites one at a time?

I've talked to a few people who seem to just dismiss the complication entirely and say they don't bother considering it, but it would seem to me that states with budgetary problems could easily go troll the ownership of MLPs doing business in their states and audit them all in one swoop as an easy source of incremental revenue, so it's not something I want to ignore.

Anybody have any suggestions?

Thanks.
kevin
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No. of Recommendations: 1
My suggestion:

Although the common wisdom is to avoid MLPs in IRA accounts, provided dividends (distributions) from any one individual MLP doesn't exceed $1,000 in any given calendar (tax) year, then there's no need, or obligation to file, or pay taxes.

This, of course, would be irrelevant to those who think a few thousand dollars worth of tax-free distributions are a pittance and not worth bothering with.

kelbon
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Specifically... the potential for owing (and far more importantly, having to file a return for) state income tax in every state where an MLP has assets.

I've not tended to worry about this, but I've also not held so much in MLPs that I thought it a concern. While not a tax expert by any stretch, I have assumed that if below 'typical deduction levels' for a state return, I wouldn't have to worry about it. May not be right, but ..... If you are going to own enough to generate 10's of thousands of dollars in such income, then it is certainly worth following up. If we are talking just a grand or two ... I seriously doubt you have much to concern yourself with.

While I don't know a universal resource, the investor relations units of these companies are used to these kinds of questions. They can't give you specific advice, but can certainly note what % of income came from what states in years past and how predictive that will be going forward. Probably also have different states treat the distribution. Many do have state concentrations i.e. are not that geographically diverse.

Ralph
Helical Investor
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My suggestion:

Although the common wisdom is to avoid MLPs in IRA accounts, provided dividends (distributions)
from any one individual MLP doesn't exceed $1,000 in any given calendar (tax) year, then there's
no need, or obligation to file, or pay taxes.


Not correct on two counts.
1. It isn't distributions exceeding $1,000. It is Unrelated Business Taxable Income (UBTI)
exceeding $1,000 annually.
2. The $1,000 is not per MLP. It is $1,000 for all MLPs in the IRA.

I have tended to own only one MLP in my Roth IRA to reduce my chances of triggering UBTI.
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Why not just have someone do your taxes this year? If you already have MLPs, all of this is just water under the bridge. It's too late to do anything about.

More importantly, you have a tax professional to answer your questions, rather than some second hand information. I think your peace of mind alone, would be worth the fee and based on the information you get you can readjust your portfolio if need be.

Peter
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Specifically... the potential for owing (and far more importantly, having to file a return for) state income tax in every state where an MLP has assets. How do I look at an MLP and a.) understand how much income will potentially be applicable to each state and b.) anybody aware of a one-stop-shop that will help me understand on a state-by-state basis what would trigger the requirement to file a return, or do I have to go plow through state.gov websites one at a time?

I wouldn't quite call it a one-stop shop, but the link below is a starting point.
http://en.wikipedia.org/wiki/State_income_tax

So the map identifies seven states that have no income tax and two that only tax dividend and
interest income. I said "starting point" because some states have a minimum income threshold
to file. If you don't reach the minimum income in that state. it too can be crossed off one's
list. I guess, if one started buying major stakes in MLPs, they could create a spreadsheet
with states by row, "taxable income definition" in columns
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No. of Recommendations: 4
Okay, here's a better sit for state tax info:

https://www.retirementliving.com/taxes-by-state


Click on a specific state on the map, and it provides state specific data

Note to self: Create document for MLPs and include this link
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"provided dividends (distributions) from any one individual MLP doesn't exceed $1,000 in any given calendar (tax) year, then there's no need, or obligation to file, or pay taxes."

Hey Kelbon...

Thanks for the response. Is that $1,000 in any given state... or $1,000 overall? i.e. could you build a larger position in an MLP with assets in 20 states vs. one that has assets in two? Do all states agree on that $1,000 cutoff? Do you have a source that documents that?

Thanks again!!
kevin
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Hey Ralph,

Thanks for the response.

"While I don't know a universal resource, the investor relations units of these companies are used to these kinds of questions."

Yeah, I've hit them up and they typically can't/won't speak to state income tax filing requirements... which makes sense.
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"Okay, here's a better sit for state tax info"

This is a great site, thanks for posting!
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http://boards.fool.com/search/solr.aspx?q=%28mlp%29&mbmi...

Try this or ask the question on the Tax Issues board.

bob
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kevin,

I've been corrected on two counts by Hohum!

My very limited knowledge on the subject was gleaned from my brokerage and my accountant. It's entirely possible that what Hohum says about the $1,000 limit is correct. I only have one MLP in an IRA account so, for me, the issue is mute. And, I could have easily misunderstood; that the limit is $1,000 in total, not $1,000 per MLP.

I pretty much stay away from MLPs because of the tax issues; how convoluted and mysterious they are.

kelbon
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It's entirely possible that what Hohum says about the $1,000 limit is correct. I only have one MLP in an IRA account so, for me, the issue is mute. And, I could have easily misunderstood; that the limit is $1,000 in total, not $1,000 per MLP.

IIRC, the issue was addressed in a thread on the "Tax Strategies" board. Of course, finding that
thread is like looking for a needle in a haystack.
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I believe that, while IRAs are immune from federal income tax - putting aside the UBTI issue, I believe you can still owe taxes to a state from an IRA. Penn is particularly bad as you are supposed to file even if you owe $1. I am sorry I can't provide a source for these beliefs as I have done a lot of reading on this topic and I don't remember where I read the info on state taxes in an IRA, but I remember it being a reputable source. Don't get me started about what I've read recently about "recapture"...
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