How MLPs Can Cut Your Tax Bill

Investments that produce income are popular right now, but nobody likes getting taxed on their investment income. Master limited partnerships can give you the best of both worlds: high income and low taxes.

In the following video, Dan Caplinger, the Fool's director of investment planning, looks at how MLPs can cut your tax bill. He notes that, as tax-favored investments, MLPs pay no tax at the entity level, instead distributing income to their uniholders. Moreover, much of the income that MLPs generate isn't taxable, and investors get the benefits from depletion, depreciation, and other useful tax items.

Dan examines some common MLPs. Although Kinder Morgan (UNKNOWN: KMP.DL  ) and Enterprise Products Partners (NYSE: EPD  ) are a couple examples of how pipeline companies dominate the MLP space, Dan points out that coal MLP Alliance Resource Partners (NASDAQ: ARLP  ) also shares many of the same benefits. StoneMor Partners (NYSE: STON  ) actually falls outside the energy space entirely, with its funeral services business. Dan concludes by noting that the complexity of dealing with special tax-reporting rules have led some investors to buy MLPs through the Alerian MLP ETF (NYSEMKT: AMLP  ) . Some adverse tax consequences of the ETF are enough to justify buying individual MLPs as a way of capturing both high yields and low taxes.

How to fight back against higher taxes
MLPs are just one way you can try to reduce your tax liability. Yet tax increases that took effect at the beginning of 2013 affected nearly every American taxpayer. It takes smart planning to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "How You Can Fight Back Against Higher Taxes," the Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2013, at 2:31 PM, mr091468 wrote:

    We elected to place KMR shares in our taxable accounts thereby avoiding current taxation because KMR pays a stock dividend and not a cash dividend. And, we avoid the hassle and bookkeeping of k-1's.

  • Report this Comment On October 07, 2013, at 12:35 AM, wolfhounds wrote:

    Anyone getting a k-1 can pay a CPA to prepare their taxes. Dan, I enjoy your discussions but you missed some significant tax planning benefits of owning the larger MLP's. Since are constantly adding massive projects that add to depreciation and amortization each year, they almost never produce current taxable business income. The yearly tax losses serve to decrease your tax basis. Any reinvested distributions increase your basis. Over the very long term Your tax basis will decline and your deferred losses will increase.

    I have used this consequence to sell KMP over the last 20 years in years when I had a spike in taxable income. This may sound counter intuitive, but the sale produces a capital gain taxed at capped rates. Over the years it has zero to the current 20% in certain brackets. However, your deferred losses are triggered and offset ordinary income. This is always substantially higher than the capital gain. I then repurchase the shares.

    Even if some of the income is needed and not reinvested, it will only change the capital gain.

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