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.