Let us state at the outset that we are not professional tax planners. Each investor should consult with their accountant and/or financial advisor on questions specific to their personal tax situation.
We are, however, professional MLP investors. As our subscribers know, MLPs’ massive distribution yields and appreciation prospects relative to other equity investments make them potentially desirable long-term holdings in retirement accounts.
Individual Retirement Accounts (IRAs) with MLPs may face additional income-tax reporting and payment requirements when they generate Unrelated Business Income Tax (UBIT).
In what follows, we’ll explain the ins and outs of UBIT is and how it's treated in an IRA.
A Brief History of MLP Taxation
In the 1980s, high statutory income-tax rates for individuals incentivized the use of corporations as tax shelters. High earners could often avoid taxes by earning their income through corporations, which had lower marginal tax rates than individuals.
Congress reined in the use of corporate tax shelters through the passage of the Tax Reform Act of 1986. The Act lowered federal income tax rates on individuals relative to corporations, which, in turn, negated the usefulness of corporations as tax shelters.
However, the Act had an unintended consequence: Increasing the use of partnerships as tax shelters. Partnerships can shelter an individual’s income tax by avoiding the double taxation to which corporations are subject.
A corporation is a distinct legal entity, separate from its shareholders and employees. Like individuals, a corporation must pay tax on its income. If a corporation pays dividends, its shareholders must pay income tax on them, as well. The corporation and its owners are therefore subject to taxation two times: at both the entity level and the individual level.
A partnership, by contrast, is generally not taxed at the entity level. Instead, all of a partnership’s tax items “pass through” to its partners, who are taxed only
HFI Research's Dedicated MLP Service!
Piggybacking off of our successful main service, HFI Research, we are taking advantage of the current price disconnect in MLPs in relation to their fundamentals.
Our new service will include:
- Subscribers to HFI Research MLP will receive 4-6 exclusive idea write-ups per month.
- Real-time portfolio tracking including what to buy, when the dividend will be paid, tax implications, weighting, and much more.
As a launch special, we are giving everyone a 2-week free trial along with a 20% discount! Come and see for yourself what we are all about!
