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 (NYSE:KMP)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.

 

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners and Enterprise Products Partners. It recommends and owns shares of StoneMor Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.