Master limited partnerships have been a lucrative investment over the years, with solid income that carries tax advantages over other investments. But many investors are scared to death of the tax complications of MLP investing.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, runs through the basics of MLP taxation. Dan notes that because MLPs incur no entity-level taxes, their investors have to deal with pass-through taxation via K-1 forms. That introduces a big headache for tax purposes, as K-1s are more complex than regular 1099 forms on other investments and can also have state income tax implications even for states other than where you live. But Dan notes that some companies have offered solutions to the tax issue, with Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) offering investment opportunities through Kinder Morgan Management (UNKNOWN:KMR.DL) and Kinder Morgan (NYSE:KMI), while Linn Energy (NASDAQOTH:LINEQ) has its related LinnCo (UNKNOWN:LNCO.DL) entity. Dan concludes that taxes shouldn't be your only consideration with MLP investing, but it's important to understand the issues involved before you invest.