Reuters for the Business Standard writes:If the US Supreme Court strikes down a federal law defining marriage as between a man and woman, the newfound rights for gay married couples may bear something not so welcome - a bigger tax burden. That's because with equality, gay couples will face the same tax woes of many heterosexual couples with similar incomes, including the tax hit known in America as the marriage penalty. Taxpayers filing as married couples may be forced to pay higher taxes as their collective income crosses into a higher tax bracket sooner than if they were filing separately.
Oral arguments on Wednesday gave gay marriage backers hope the court would overturn the 1996 Defense of Marriage Act (DOMA) after a majority of the nine justices raised concerns about the law's validity under the US Constitution.
Taxes are at the very heart of the challenge to DOMA.
The case involves Edith Windsor and Thea Spyer, a New York couple. When Spyer died in 2009, DOMA prevented Windsor from enjoying one of the biggest tax breaks enjoyed by heterosexual Americans - the exemption from federal estate tax on wealth passed from one spouse to another.
If the law is struck down, the ruling extending the exemption to gay and lesbian surviving spouses would also clear the way to more than 1,100 federal benefits, rights and burdens linked to marriage status. Cynthia Leachmoore, a tax preparer in Soquel, California, has about 40 same-sex married couples as customers ranging from teachers to Silicon Valley workers.
A handful of them have joint incomes that top $1 million. They're facing $25,000 to $30,000 more in federal and state taxes if DOMA goes down and they file taxes jointly, she said. "Most of them don't care. They'd really like to be able to say that they were married" on tax returns, Leachmoore said. "That's more important to them."
Complications Married gay couples would see other benefits, including a break in taxes now paid on health insurance and greater access to federal family and medical leave.
There are some 130,000 same-sex married couples in the United States as estimated by the Census Bureau, and nearly 650,000 same-sex couples, married and not, in total.
The Byzantine US tax code's marriage definition is not consistent. In some sections, the marriage provisions are defined for a "husband and wife." Other places say "spouse."
If the law is struck down, the Internal Revenue Service may need Congress to clarify the tax code, or the Obama administration may say same-sex married couples will be treated the same as opposite-sex marriages, said Annette Nellen, a tax professor at San Jose State University.
Good for tax coffers The nonpartisan Congressional Budget Office in 2004 estimated that recognition of gay marriage would, on net, help the budget's bottom line by $1 billion a year over 10 years. The increased revenue would account for about 0.1 percent of total federal revenues at the time.
The Williams Institute, a unit of the University of California at Los Angeles School of Law, estimates that gay marriage may be good also for the fiscal health of states and localities that legalise it. Of the 50 states, 31 have constitutional amendments banning gay marriage. It is legal in nine states and Washington, DC.
The remaining states' policies vary, with some recognising marriage from other states, some providing some of the legal benefits of marriage and others denying marriage by state laws. Williams Institute estimated that if Rhode Island legalised marriage, its coffers would gain $1.2 million in 2010 dollars over three years, largely due to lower spending on social welfare programs and increased income tax revenue and marriage licence fees.
That is the small slice of the hundreds of millions in operating deficits Rhode Island is expected to be working under in the next five years, as estimated by a governor's report. Because of differing state laws, it is unclear what the impact might be in states with laws disallowing gay marriage.
Brian Moulton, an attorney with the Human Rights Campaign, said that if he married legally in Washington, DC, and moved to Oklahoma, where gay marriage is not legal, the federal government might still recognise the union.
But Todd Solomon, a partner at law firm McDermott Will & Emery and author of a book on domestic partner benefits, said he was not so sure that would be the case.
"It is an open question as to what happens in Oklahoma," he said. "Each state will still be allowed to legislate marriage."
Income, estate, health taxes Although the case was about the estate tax, only 3,600 estates owed the estate tax in 2012, according to government figures, and the wealthiest Americans pay most of it.
The end of DOMA might also save same-sex couples from having to pay some federal taxes on healthcare benefits they receive through a spouse's employer. Unmarried domestic partners on average owe an extra $1,000 annually in taxes on these benefits because they are now taxed, according to Williams.
"Everyone will get a benefit if they were carrying health insurance," said Nanette Lee Miller, head of non-traditional family practice at accounting firm Marcum LLP in San Francisco.
The impact on Social Security benefits will be mixed. DOMA prevents same sex couples from claiming the survivors benefits extended to married couples. But Social Security recipients might face greater taxes on their benefits because they will hit the level where the benefits begin to be taxed sooner if married.
Rob Pen for Life HealthPro writes: Planning for retirement is a challenge that changes with each client,
and there is certainly no one-size-fits-all solution. That said, you
may — or may not — be surprised to hear how many truly core retirement
principles your clients have never even thought about. Here are six time-tested rules that it’s worth repeating over and over and over again.
Lesson 1: It’s your responsibility to plan for retirement.
Unless your client plans to work until the end of
life, someday he or she is going to retire — and it may not be by
choice. No longer can any of us depend on our employers to save for our
retirements. With the exception of the federal and state governments,
few employers have a pension plan and now several states are cutting
back on retirement benefits. Most corporations have changed to a 401(k)
plan where the employee can contribute up to $17,000 and an additional
$5500 (called catch up) once they reach the age of 50. The
reason for the catch, quite obviously, is that most employees have not
saved enough in their younger years. The catch-up gives them an
opportunity to save more in the peak earning years.
While retirees today depend on Social Security, its future is in
jeopardy. Most experts believe it will continue, but the amount paid may
be less if it is determined by need. Therefore, in addition to funding a
company retirement plan, your clients also should be saving in other
tax deferred and taxable accounts.
You’ve heard it a 100 times: Most people don’t plan to fail, they just fail to plan.
I see it every day and it is true. I often hear employees say, “My
employer doesn’t match any of my contributions, so I’m not going to
contribute either” or “I don’t trust my employer with my money” and the
classic “I can’t afford to right now.” Successful retirees don’t make
excuses; they take action. They enroll in their employer’s retirement
plan as soon as they are eligible, even if the employer doesn’t match.
Saving for retirement is a habit; therefore, they continue putting money
away in other investments like a Roth IRA. Retirement is their No. 1
goal.
With the creation of Target Date Funds, investment selection has
become simple. All your client needs to do is choose the date that they
plan to retire, and fund managers will allocate their money according to
the time remaining until retirement. For younger clients, the
allocation has more risk; if you’re ten years away, it will be more
moderate allocation.
Lesson 2: Develop a budget and live by it.
Successful retirees understand the difference between a need and a
want early in life and on into retirement. They simply live below their
means. While this has become more difficult with the temptation of
credit, you just have to say NO! As a financial advisor, it may very
well fall in your job description to emphasize this with your clients.
Remind them that it’s not how much you earn each year that’s important;
what matters is what percentage of those earnings you are saving. I’ve
seen couples in their 50s who are making over $250K and have less than
$50K in their 401(k), and nothing in savings. I see college graduates
get a job, and the first thing they do is go buy an expensive car. Hey,
I’m a car buff. I love cars. However, even I eventually realized that a
car is a means of transportation rather than a status symbol.
The earlier you get started saving for retirement,
the less you’ll have to save because time is on your side. So, don’t
suffer from “excusitus” by creating a lifestyle that you’ll be paying
for the rest of your life. Fund your retirement instead.Encourage
every client to start out by saving at least 15% of their income for
retirement until they reach the annual maximum contribution.
Lesson 3: Don’t have unrealistic expectations.
In the 1990s, the stock market was averaging returns of over 10%
annually. Investors thought this would continue, and by the end of 1999 a
large percentage of investors had moved all their money into aggressive
tech investments that had made 70% the year before. Then the dot com
bubble occurred. After seeing their 401(k) now equal to half the value
it once was, they started calling their 401(k) a 201(k).
For fear of losing everything, employees began shifting their money
into guaranteed investments. In this case, because you are making
monthly contributions, you are taking advantage of buying when the
markets are low. Encourage your clients to focus on share accumulation —
buying more shares when the price is down — rather than how much the
stock market has dropped.
One excuse I often hear is, “But I could lose everything.” That’s
true if you put all your money in your company stock and it goes
bankrupt, which does happen from time to time. However, if you diversify
into different asset classes (which Target Date Funds do for you
automatically), chances are you won’t lose everything. Our great
country is based on capitalism and therefore every publicly traded
company either produces a good or a service. While all companies go
through good times and bad, as long as every working American gets up
each and every morning to go into work, capitalism will prevail.
Another lesson that every client needs to hear: Do not borrow from
your 401(k). Chances are they won’t pay it back. If they do pay it back,
chances are they’ll borrow from it again. A retirement plan is to be
used for retirement, which one day will happen. It is not an account to
tap for a trip to Disney, your daughters’ wedding, a new car, a bigger
house or a college education. These are all goals which should be
planned for separately. Encourage your clients to establish an emergency fund of three to six months of living expenses that they can draw from if needed.
Successful retirees do not invade their retirement. When it comes to
assisting their children financially, they set limits based on what they
can afford rather than what everyone else is doing. If you end up going
into debt or possibly bankruptcy because of supporting your children
(who are capable of supporting themselves) what have you achieved? The
truth of the matter is this: Children believe their parents have more
money than they really do, and parents often don’t want to tell their
children they can’t afford to help them.
Lesson 4: Take advantage of the tax savings your retirement plan offers and gain a basic understanding of our tax code.
In lesson two, I noted that the amount you save is more important
than the amount you earn. There I was referring to saving vs. spending.
In this lesson I am referring to the amount you get to keep vs. the
amount you pay in federal and state taxes.
Retirement plan contributions are tax deductible, which means you are
saving both federal and state taxes on your contributions. For example, suppose your client’s income is $50K, and he is saving
10% ($5000) annually. If he is in the 15% federal tax bracket and 6%
state tax bracket, he will save $750 in federal and $300 in states
taxes, for a total savings of $1050, all based solely on his decision to
contribute to his company retirement plan. I remember a client who
increased his contribution and his next paycheck was higher. He thought
surely someone in payroll had made a mistake. After further review, we
determined that by raising his contribution amount it reduced his
taxable income, moving him from the 25% tax bracket to the 15%.
The difference between a long-term capital gain and a short-term
capital gain can equal thousands of dollars. Suppose you are in the 25%
federal tax bracket and the 7% state tax bracket, and you sell 500
shares of Apple stock that you paid $150k for, which is now worth $300k.
If you make this move prior to holding the stock for one year, you will
owe ordinary income tax on the $150k gain, so 25% ($37,500). If you
sell the shares after owning them for more than one year, you will pay
only the long-term capital gains rate, which is set at 15%, so $22,500.
This is, of course, assuming that the stock is at the same value after
one year. (Note that the state tax rate doesn’t change depending on
long- or short-term capital gains.) There are several tax surprises retirees soon learn about. While some
rush to start taking Social Security benefits at 62, they often find
themselves going back to work. If they did this in 2012, they soon
learned that their benefits are reduced by $1 for each $2 that you earn
above $14,640 until they reach the full Social Security age, which is
currently 66.
Next, they learn that their Social Security income is taxable. That’s
right, up to 50% of your benefits will be included in your taxable
income. If your income plus half your Social Security benefit is more
than $25,000 Modified Adjusted Gross Income for a single taxpayer, or
more than $32,000 MAGI for married filing jointly, your benefit will be
taxed at 50%. That 50% rate jumps to 85% when the base amounts are
$34,000 MAGI for single and $44,000 MAGI for married filing jointly.
After explaining this, I often hear, “Wasn’t that income already taxed?” The next tax that I am seeing on more tax returns is the Alternative
Minimum Tax or AMT. This is a tax that was enacted in 1970 to tax 155
high-income families that were able to reduce their taxable income to
zero because of their itemized deductions. After 40 years and several
modifications, AMT now affects millions of families each year.
Unfortunately, like most laws there are unintended consequences.
Millions of middle class families are affected by the AMT, and that
number is growing each year.
Determine if the state you live in is retiree-friendly. Look for a
state where Social Security benefits are exempt from state income taxes.
Many states exclude government and military pensions from income taxes
or offer a blanket exclusion amount for retirement income. Also,
consider sales tax, property tax and estate tax.
Lesson 5: Take advantage of all your employee benefits and protect your assets.
While most employees can’t wait to enroll in their employer’s
healthcare benefits, they tend to pass on the other benefits. Take
disability insurance for example. According to the National Association
of Insurance Commissioners, 25 percent of 35-year-olds will experience
at least one period of disability during their careers, which will make
it impossible for them to work and earn a living for 90 days or longer.
The risk only increases as we age. Long-term disability can quickly
deplete your assets quickly if you are not insured for this risk.
While employers typically limit the amount of life insurance
benefits, these group polices are reasonably priced, so encourage your
clients to take advantage of them. Today more than ever, families are
underinsured. Some of the excuses I commonly hear are, “I don’t believe
in life insurance” or “My wife doesn’t work so therefore she doesn’t
need life insurance.” Spell things out for your clients. Ask them, “How
much would it cost to hire a full-time nanny to care for your children
until they are old enough to care for themselves?” As a rule of thumb
you should have ten times your annual income, and while your needs are
usually the greatest when raising a family, a need may still exist after
retirement.
Successful retirees not only take advantage of all the employee
benefits available to them, they also protect their other assets. They
purchase homeowners, auto, life, and umbrella insurance while they are
working, and replace their disability with long-term care insurance when they retire.
Lesson 6: Establish and maintain your estate plan.
Of all the lessons, this is probably the one that is most overlooked.
“I’m not planning on dying anytime soon,” a friend once told me. A week
later he died of a heart attack, leaving a wife and two young children.
Estate planning creates a master plan
for the management of your property during life and the distribution of
that property at death. An estate plan can be made quite simply.
Every client you work with should at least take advantage of will
substitutes. A will substitute is a technique that allows you to
transfer property at your death to a beneficiary outside the probate
process. This will not only expedite the distribution process, but also
avoid any costs associated with probate. Joint tenancy with right of
survivorship (JTWROS) and tenancy by the entirety (TBE) transfer assets
to the surviving tenant at the death of the other. While JTWROS can be
used by non-spouses, tenancy by entirety can only be used by legally
married husband and wife, and is not recognized in all states.
Naming a beneficiary is also a will substitute. While most people
name their spouse as the primary beneficiary on their retirement plan,
life insurance, or annuity,
they fail to name a contingent beneficiary, such as their children who
are age of majority. This would ensure that your children not only
receive your IRA should you and your spouse pass away together but also
stretch the annual distributions out over their life time.
In addition to will substitutes, successful retirees also have a
will, durable power of attorney, health care power of attorney and a
living will. Make these six simple retirement rules part of every interaction you
have with a new client. Your role as an advisor is to educate and mark
out the path to financial success. It’s an important job, and these
rules are a good starting point.
The following is serious investing/tax strategy & planning talk. If you're not into this it will give you a headache. The discussion/commentary that follows is insightful and very enlightening and how we (CPAs & Financial Advisors) play the game down in the trenches and behind the curtain - the back and forth, pro and con of decisions and strategy. Here we go! Analytical Chemist for Seeking Alpha writes: Disclosure: I am long LINELinn Energy (LINE)
is a widely owned stock favored in part because of its large and
growing distributions. Linn and other master limited partnerships (MLPs)
have recently come under fire as poor investments for retirement
accounts. Many investors know that the sum of all unrelated business
taxable income (UBTI) in an individual's retirement accounts cannot
exceed $1,000 a year without having to pay taxes. Recently, however,
there has been a great deal of discussion about whether selling
partnership units in a retirement account requires recapture of previously depreciated assets. In one case, this scenario so scared an investor that he sold all of the MLPs held in his retirement accounts. For many investors, however, a careful consideration of the facts reveals that an IRA is the best place to put MLPs.
Linn Energy Corporate Structure As
a partnership, Linn Energy pays no corporate taxes and instead passes
through income and deductions to its unit holders, who include that
information on their personal tax returns. Many of these partnerships
have good cash flow and pay high distributions, but use high
depreciation and other deductions to reduce ordinary income. The
distributions received often consist of return of capital, reducing
one's cost basis but incurring no income tax. Partnerships like Linn
Energy are thus often tax-deferred investments. Tax-deferred does not
necessarily mean tax-advantaged, however, and it can easily be
detrimental to investors to hold these investments in taxable account
instead of tax-deferred (traditional IRA or 401(k)) or tax-free (Roth
IRA or Roth 401(k)) accounts.
Linn Energy also has an affiliated stock, Linn Co. (LNCO),
whose sole purpose is to hold Linn Energy units. It distributes unit
income received, less some fees and some withheld for taxes. The current
distribution rate is 71 cents per share per quarter, while that for
LINE is 72.5 cents per share per quarter. LNCO also trades at a premium
to LINE of 5.6% as of this writing. LNCO, however, reports normal 1099
dividends instead of the more cumbersome K-1 partnership forms sent out
by LINE.
Holding MLPs in IRAs In
traditional IRAs, no taxes are due until money is withdrawn, at which
point withdrawals are generally taxed at ordinary income rates. Roth
IRAs are funded with after-tax dollars and earnings are generally
tax-free. MLPs in either type of IRA present the special situation of
unrelated business taxable income -- if an IRA has more than $1,000 in
UBTI in any tax year, the IRA owes tax.
The amount of UBTI is highly variable depending on the individual
issue, but I can say that according to the K-1 forms I've received from
LINE, UBTI has been zero or negative in five out of six years that I've
owned shares. I have therefore been completely unconcerned about UBTI on
my LINE shares.
Another potential issue with holding MLPs in IRAs
is the possibility that upon selling, recapture of depreciation results
in UBTI. There has been significant discussion and disagreement on this issue on Seeking Alpha and elsewhere,
and I don't have enough space here to fully describe the debate. It
should also be mentioned that this shouldn't be an issue for investors
who plan never to sell an MLP. However, for my purposes this issue can
be easily avoided: If an estimate of the recapture generated upon sale
is total distributions received minus cumulative UBTI, then we can be
safe and simply sell a position each time total distributions approaches
$1,000.
You might be wondering the wisdom of such a course; after
all, won't this generate significant transaction costs? Not really. At
forward distribution rates, 100 shares of Linn Energy would take 13
quarters to distribute $1,000. If one were to sell Linn Energy every
three years, and pay commissions of say $8 each transaction, then an
annualized expense ratio would be 0.14%. In the case of Linn Energy, the
LINE units under this strategy are more appealing than the LNCO shares,
which do not issue a K-1 but pay a 2.1% lower distribution and trade at
a 5.6% premium. Instead of 100 shares of LINE generating $290 in
distributions per year, the same dollar amount invested in LNCO would
buy only 94.7 shares and generate only $268.95 in distributions
annually. Following the safe strategy of selling LINE every three years
in an IRA instead of simply holding LNCO would be better by 0.43%
annually after all costs.
Why "Tax Advantaged Investments Should Not Be Held in Tax-Advantaged Accounts" Is Bad Advice Common
wisdom holds that tax advantaged investments such as MLPs should not be
held in tax advantaged accounts such as IRAs. As a rule of thumb the
common wisdom is fine. But tax strategy for your investments need to be
tailored to your individual tax circumstances, of which there are as
many as there are investors. In many cases, an IRA is the best place to
hold an MLP. Consider the following situation:
An investor has
$5,000 to invest and has decided that they will invest in Linn Energy.
They are currently in the 15% tax bracket, and expect a higher income in
the future. Their choices of where to put that $5,000 are: regular
brokerage account (pay taxes on income and investment profits),
traditional IRA (don't pay taxes on income now, but pay taxes on
withdrawals), or Roth IRA (pay taxes on income now, pay no taxes on
investment gains). Whether an investment is tax advantaged or not
doesn't change the fact that the Roth IRA is likely the best account for
this investor. A traditional account -- suggested by conventional
wisdom -- would likely be the worst possible choice for this investor
for an MLP, as they defer 15% income taxes now to pay 25%, 33%, or
higher taxes when they sell later.
Indeed, in this example, if the
investor wanted (e.g., for easier accessibility) to hold Linn Energy in
a taxable brokerage account, they would most likely be better off
buying LNCO instead of LINE. Fellow Seeking Alpha author Reel Ken had an
excellent article demonstrating this point,
but the main point is that MLPs defer current dividend and capital
gains taxes into ordinary income when sold. When an investor starts and
ends in a higher tax bracket, it can take 20 years or more for an MLP to
be tax advantageous. If an investor starts in a lower tax bracket and
moves into a higher tax bracket before selling an MLP, the investor
almost certainly would have been better off holding common stock (LNCO,
in this case, even considering the lower distribution rate). Of course,
if an investor is in a high tax bracket now but anticipates selling when
in a lower tax bracket, the math changes yet again and the MLP may be
advantageous. In any case, conventional wisdom is only a general
guideline and in regards to MLPs can easily lead investors astray. I'm
neither a registered investment advisor nor a tax professional, but it's
clear that investors need to consider their own personal tax situation
to determine whether LINE or LNCO is a better investment, and whether it
should be held in a taxable, tax-deferred, or tax-free account. For me,
LINE in a Roth IRA was the best choice.
Disclaimer:I wrote this article
myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business
relationship with any company whose stock is mentioned in this article. Reminder -- consult a qualified tax professional for information on your specific tax situation.
Although you did not mention it specifically, age is another
factor in the LINE/LNCO equation. Having reached retirement age, LNCO
is a nice vehicle for "life simplification". The IRAs and 401s are
pretty much set, so different priorities are in play.
I think this is an unfortunate piece. It
exhibits either disregard for the proper tax treatment of MLPs in an
IRA or just ignorance.
If you really have doubts about the
taxation, then don't write an article taking a position or do some
research and offer something useful.
It's interesting that your
article is about LINE, because if you bother to contact their tax
department you will find out that they are on record that, upon sale,
the recapture is UBTI.
The tax Code is a maze. Anybody can do
research and lose their way. I have many times. But to not do any
research and just offer an opinion is not what people should expect.
Not, at least, from any serious author.
Good comment Reel Ken. While UBTI is regularly not an issue
with retirement accounts investing in MLP's, the recapture upon sale
will catch the unsuspecting retirement account investor, especially if
you've owned the asset for years. Why tempt fate, There are a few MLP's
that have the structure like LNCO, or offer regular dividends, such as
KMI and EEQ that would do the job for retirement accounts.
Reel Ken, to hit the UBTI taxation level in an IRA, or even
get close to it, one must be a multi-zillionaire and have loaded up IRA
accounts with specific MLPs. Those are lucky people who need not worry
about taxes.
When you sell your units, all those nice distributions you received without paying UBTI tax are taxed. It is called "recapture".
That
means, in order to avoid UBTI on the sale your cumulative distributions
would have had to be less than approximately $1,000.
Now, say
the average investor held units for only five years, they would have to
had distributions under approximately $200/year. Assuming a 5%
distribution yield, that equates to a holding of about $4,000 in unit
value. If they held for as long as 10 years, that equates to an
investment of only $2,000.
So, your premise is backwards. It is
not the multi-zillionaire that would face the issue. Only the very
modest investor would escape. These are, as you might put it, the
unlucky people that probably don't know what they're doing anyway.
This article really wasn't about UBTI in
IRAs. That issue has been discussed many times and in much greater
detail than I could have here, and I linked to several sources for
readers who wanted greater detail.
Instead, this article largely
focused on what an investor should do with that information. For many
people, the issue of recapture may make investing in LINE in an IRA
unattractive. They have one particular tax situation. For others,
investing in LINE outside of an IRA is not as attractive an investment
as investing in LNCO would be, due to deferring capital gains but paying
ordinary income tax rates when paid. For me, my position in LINE is of
a size that holding it in my Roth IRA is the best decision for me.
In
all of these cases, investors should not trust conventional wisdom, or
what one writer on Seeking Alpha is doing. Instead, they should apply
principles discussed on Seeking Alpha to their own particular tax
situation. The details make all the difference.
No. UBTI is the tax paid on net earnings. Distributions are the monies the MLP distributes.
Each distribution consists of two parts; earnings (which are subject to UBTI each year) and Return of Capital (ROC),
which are not subject to current UBTI. So, on an annual basis you need
only concern yourself with UBTI and that is what the K-1 reports.
It
gets a little complicated from here. The reason you can receive ROC and
not be currently taxed comes from one of two areas. ..
1) The
ROC can come from liquidation of an asset and not be supported by
earnings. You don't want this, it means the distribution is in jeopardy
andf the MLP is unhealthy. You've got bigger problems than taxes.
2)
The distribution can come from actual earnings that are shielded from
tax by depreciation and/or depletion allowances. This is almost always
the case for a healthy MLP and certainly the case with LINE.
Now,
when you sell the MLP, the depreciation/depletion that shielded the
earnings from annual UBTI, is recaptured and taxed as UBTI.
Though
there are various accounting adjustments, the shorthand is to consider
that the UBTI on sale will roughly equal the amount of prior
distributions that were not subject to UBTI on the previous K-1's.
I know it's complicated, but it's not of my doing, blame the IRS.
Hi Reel Ken, I would assume your intentions are good here.
Might be best if you direct people to an attorney who specializes in
MLPs. My tax attorney was on counsel at an MLP for 20 years and she
continues to be active in their activities, and taxation issues
regarding MLPs. She strongly encourages the "Average Joe" to pile MLPs
into IRAs if that is the overall strategy. I have gone over the UBTI
issue in detail with her and she, nor I have any concern.
I have consistently recommended seeking
competant advice. Quite frankly, if your attorney has no problem with
piling them in IRAs she either doesn't understand the problem or doesn't
care.
Maybe she should have a discussion with the attorneys at
Tax Package Support or the Attorneys that wrote the Code. Because they
aren't on the same page with her.
I do find it interesting
though, that it seems no matter what issue is at stake, it seems there
are plenty of attorneys that getting paid or working for businessess
that don't see problems that others see.
My granma used to call it "biting the hand..." and .."knowing where your bread is buttered..."
It is the custodian's responsibility to fill out the forms (990-t) and extract the tax from your IRA account.
The
custodial agreement generally passes the responsibility for providing
them the info on your shoulders. It is wise to read your custodial
agreement to determine who does what.
Of course, the clerks in the brokerage houses have no technical expertise, so be prepared for anything.
Well this is the poster child for passing the buck to the investor.
It's
really not an IRS issue as you signed on to it and therefore accepted
the responsibility to complete all forms. All your custodian is doing is
mailing them in and cutting the check.
So, the onus is on you, better learn how and when to complete 990-T. Sorry.
hey analytical chemist.... jim cramer linked your article on
twitter. calling it a "good piece on linn energy." i've never seen him
link any SA article before.
Appreciate your tactful & informed comments (&
articles), Reel Ken... I've been waiting until lock-up period on LNCO
has passed before taking a position... Apr 10th as I recall. In your
view, does that make sense or won't the lock-up expiration be a factor
for LNCO? TIA.
If arson is retired and has no earned income can a person have
lnco in a roth? My cpa said that you cannot because they have a
distribution and not a dividend and that will increase the value of your ira, and you cannot increase if you don't have earned income, unless it's from interest or a dividend. thanks
First, LnCo is not an MLP it is a stock just like any other stock.
The
distribution is either a dividend or return of capital. We all know the
dividend is O.K and the return of capital is the same as if you sold
part of your stock.
The IRS makes no distinction, whatsoever, on
investments by the ROTH on account of your retirement status or
earnings. The only restrictions are on additional contributions from
personal funds, without earnings, but that doesn't mean the Roth can't
grow as a result of investment performance
Indeed, Linn created LNCO almost for the express
purpose of being in IRAs, acknowledging that IRAs aren't the best place
for LINE. Happy investing! (And you might want to start shopping for a
new CPA.)
Caleagle, Ken and I can agreed on this one: your CPA is
nuts. You only have to have earned income to contribute to a Roth.
Once the money is in there, you want it to grow. At that point earned
income doesn't matter.
I have read many MLP articles and comments on SA over the last
year. Some readers have very strong opinions on the proper placement of
these investments--maybe it goes beyond opinions, where they might be
confusing their opinion with fact. Seems like there are two very
different kinds of UBTI--as the author says the first kind appears on
your annual K-1 and is (in my experience) generally insignificant or non
existent so not an issue for most; and the second kind apparently
happens at the time the MLP is sold--the so called "recapture". I would
guess the question is whether there can be a "recapture" if there isn't a
"capture". In a taxable account you capture the tax benefit of MLPs
annually. Do you capture the tax benefit in an IRA? I would GUESS no.
But instead of guessing why don't we have one person who gives us
something beyond their personal opinion. Is there any reader who has
had the IRS tell them they owe additional taxes because they didn't
report an MLP recapture in an IRA?
I tried to look at the 990-t and don't see
anything unequivocal. Seems fuzzy to me. LINE might confirm that
recapture is taxed as UBTI but will they confirm that IRAs recapture? I
still haven't heard anything from the investing public that the IRS has
taxed them for the item. That will be unequivocal. Where are they?
If you contact the Tax Package Support for Linn ((800)
203-5179), they will tell you that all recapture upon sale of the units
is UBTI. (Don't call Linn, they are prevented from giving tax advice.)
Thus, it follows that if you hold the units within an IRA, and you have
positive UBTI over $1000, you will be liable for the tax on the amount
over that.
Roth IRAs are not exempt from UBTI; and UBTI tax rates are at trust tax rates which are the highest rates the IRS has.
It requires a little effort, I guess. Recapture is IRC Sec 1245 and 1250.
Here's the instructions from the 990-T....
"Line 4a. Capital Gain Net Income
Generally,
organizations required to file Form 990-T (except organizations
described in sections 501(c)(7), (9), and(17)) are not taxed on the net
gains from the sale, exchange, or other disposition of property.
However, net capital gains on debt-financed property, capital gains on
cutting timber, and ordinary gains on sections 1245, 1250, 1252, 1254,
and 1255 property are taxed. See Form 4797"
I think it is pretty clear (given that "Lawyerese" is never clear) when it says.. "However...1245,1250..... taxed".
Let's move on,.I've posted this and a zillion other code sections and IRS statements over the last couple years. I
Since LNCO and LINE are identical
from a business standpoint (both in the oil and gas business, so to
speak), why would you not simply buy LNCO and avoid all questions
raised as to whether you may or may not have UBTI? That's the exact
reason LNCO was created.
After the Berry merger, LNCO and LINE
will both have the same dividend (distribution), and you can avoid all
the hassles.
LNCO has traded at a premium to LINE for a while
now, probably because some people find it worthwhile to pay a bit more
in order to avoid the K-1 hassles and issues.
That is certainly true. However, it is
trading higher not because of a filing tedium. It is trading higher
because, avoidance of MLP taxation increases net yield, increasing
value.
Again, that depends on the individual
circumstances. You call this article "fuzzy and provides no real
answers" while you make universal statements that are NOT universal, and
therefore in some circumstances factually wrong. For me, and for many
other investors, LINE provides a higher yield. For another set of
investors, LNCO provides a higher yield after taxes. My comments are
fuzzy because there is not one universal right answer on the best way to
own Linn Energy. For me, holding LINE in a Roth IRA is the best
situation, and I specifically say that in this article.
You are chasing a higher yield without properly making the tax adjustments. It is net-after-tax yield that matters.
MLPs are probably the most complex investment available to the general public. The nuances are overwhelming.
You
treat it like the simplest thing around. Have you ever even seen a K-1?
or filed UBTI for a non-resident state? Have you personally experienced
the hazards of computing basis for UBTI as required under Rev Rul
84-53? Are you aware that 84-53 is so complex that the MLPs just tell
you to do it, that they won't figure it out? Do you know what a 751
statement is and would you be willing to file it? Did you file a section
754 statement on behalf of your IRA when you purchased the Units?
With
all due respect, you seem like a nice guy and you are certainly trying
hard to be of value to your readers. I respect that. But when it comes
to the ins and outs of MLPs, especially the tax ramifications and its
effect on valuations, you are a bicycle rider trying to fly an F-14.
I've read your article very carefully and this is what I take away from it. Correct me where I'm wrong.
1) You have awareness of the UBTI problems surrounding LINE and that they don't effect LnCo.
2) LINE has a slightly higher yield (currently 7.97%) vs LnCO (currently 7.37%) and you favor the higher yield.
3) You acknowledge that UBTI tax, if imposed, could reduce the yield on LINE sufficiently so that LnCo would net a higher yield.
4)
You choose LINE over LnCo because, with your modest $5000 investment,
you can "run-around" the UBTI issue with targeted systematic sales and
"earn" the extra yield LINE has to offer.
Here's my problem with your strategy.
1) We're talking about 60 basis points on a $5,000 investment. That translates into $30/ year.
2)
For this $30, you are willing to accept the extra work involved in
receiving, reviewing and filing K-1's, not to mention filing a 751
statement every time you sell.
3) For this $30, you are willing
to check each and every non-resident state's income tax requirements to
see if you have crossed the filing threshold. You are willing to file
and pay tax in these states where appropriate.
4) For this $30, you are willing to keep track of suspended loss to offset UBTI on sale. Something LINE does not provide.
5)
For this $30 you will create an algorithm that will enable you to
compute exactly how many shares you need to sell to avoid UBTI recapture
when you sell your units.
6) Since you won't know the annual
UBTI until after the close of any tax year, yet your systematic sales
must take place during the year, your algorithm will figure this out.
7) LINE is such a good investment you don't mind selling it off piecemeal each year.
8)
Your $5000 investment buys only 131 units. Your systematic selling
program means selling very small lots (as little as, say 10) and
incurring transactions fees, that could represent as much as 2%-3% of
the sales price.
9) I could go on, but do I need to?
Now,
to each their own, but for me that's an awful lot of effort and work for
$30. So I congratulate you on being willing to make such a Herculean
effort.
Ouch, I just realized that it cost me over $30 in my
time writing this comment. I hope you don't blow your $30 answering.
"Sure that's it, institutional investors just
can't wait to buy the worse of two identical investments, and they just
bid it up for self flagellation."
Page 4 of LINE's LinnCo
Presentation states that LNCO signifcantly expands LINE's investor base
to (among others) institutions. So apparently you disagree with LINE
management on this issue, which is your right, but I think they have a
better understanding of this than you.
In fact, I simply cannot
make sense of your comment. In other comments you prefer LNCO to LINE,
yet here you prefer LINE to LNCO. What gives?
Your summary points are largely correct. And although I
appreciate what you count as a herculean effort, it's really not. 1) Yes, it's about 60 basis points. 2)
It takes no effort to receive a K-1, other than opening my mail box and
an envelope. I have no filing requirement for the K-1's issued by
companies held in my IRA (not true of everyone). And there's no need to
make a 751 statement for publicly traded partnerships, which of course
LINE is. See http://1.usa.gov/XEcOIT 3)
The income so far in any given year is way below the filing requirement
for any state where there is income. This is one that might change my
opinion -- if I had a large enough position to file in other states,
that might be enough to make me to sell. Fortunately, it's not yet an
issue. 4)Not necessary with my strategy. 5) The algorithm is sell
all, buy back, each time total distributions gets close to $1000. For
100 shares, that would be every 3 years. Arithmetic doesn't seem like
too difficult an algorithm. 6) This is why it should be close to $1000, but under. Maybe $900. 7)
I can immediately sell and buy back. How good an investment it is
doesn't matter if you're only not holding it for 10 minutes. 8) I'm
not sure why you're selling it piecemeal. As I wrote in the article, I
would sell the whole position every 3 years or so. I even discussed how
much the commissions would be a drag on return. 9) You haven't given
me a reason why my strategy won't work. Will it work for everyone? No.
Is it going to be common enough that it should be the default
strategy? No. But for my particular situation, it's the best. It
obviously is not the best situation for you, and you're worried about
other people following it blindly. That's a fair concern, and I
specifically told them this won't work for everyone; that a
consideration of their own tax situation is required.
$30 or even
twice $30 is a small price to pay for education. And a number of
commenters here have thanked us because they learned something. I think
you've done a good job illustrating a variety of reasons why holding
LINE in an IRA can be bad for investors. I've identified one situation
where it's good. Readers now have to figure out their own optimal
strategy.
The premise you laid out was that institutional investors are bidding up the price.
I
disagree, institutional investors see added value in LnCo and are
simply willing to buy it. It is the added value that is causing LnCo to
outperform LINE.
Bidding up the price is a whole other matter.
I'm confused about your last mention. I prefer LnCo to LINE. What comment are you referring to?
Prices are bid up when there are more buyers
than sellers. That is the effect of the additional, institutional,
investors, that are not there for LINE. Simple supply and demand.
My
impression from your response to my original comment was that, in that
response alone, you preferred LINE to LNCO. Clearly you do not.
Look its your effort for your $30, who am I to argue.
I transposed section 754 and 751 in my question. And 754 is requuired. LINE in its k-1 package seems to think 751, too.
Since
you've obviously figured this all out, I would appreciat eit if you
could eexplain how your buy/sell 10 minute strategy gets around RevRul
85-53. Because unless you avoid this hurdle you're back to square one.
If
your strategy is to be the lessor of two investments and then try to
ratiionalize it away, then your strategy is working perfectly.
Everywhere else in this thread you quote IRS regulations as
your evidence, but here you say the Linn Energy is the better source
than the IRS? Interesting.
I can't find any sources for RevRul 85-83. The IRS at http://1.usa.gov/Xa4t3Z doesn't have a PDF on it. Can you provide more information?
To my eyes, it looks like that revenue ruling basically says
that you have to use an average cost basis instead of a first in, first
out or other method of cost basis calculation. Is that the one you're
talking about?
If so, my strategy of selling an entire position
before UBTI is triggered means that 84-53 is irrelevant, since all
methods of calculating a basis are equivalent if you liquidate the
entire position.
You've got the gist of it. The problem is that a
simultaneous sale and purchase can be construed as a partial sale and
capital contribution. Not a liquidation and new purchase. In that case,
your average basis doesn't reset.
In essence that's what 85-43
says, is that purchase and sales of partnership interests are
indivisible and you can't treat it as individual lots.
Most MLPs
will report a buy and sale in the same tax year in this way. They won't
issue two K-1's to the same taxpayer, one for each sale. Instead they
combine it as a sale and a capital contribution and 85-43 sticks its
ugly head.
What's your basis for saying that a 754 statement is required by unitholders? The IRS at http://1.usa.gov/Zx9VMO and 26 C.F.R. § 1.754-1 at http://bit.ly/YDVcTK
both suggest that these statements are made by the partnership, not by
limited partners. I'm not saying you're wrong, but I can't find data to
support your assertion.
I haven't done independent research on this, and
I reached my position because the K-1 package from EPD says to file a
754 when you purchase units. They even provide a sample language with
warnings if you don't.
It may be resultant from an accounting change they made.
If this is not the case, blame them AND blame me for accepting something without checking it out.
That fits with my research. I can't find anything
from a government source saying individual investors need to file 754
statements, but I have come across some MLPs that say you should. Other
MLPs specifically say you don't. An accounting change would fit the
data.
I think your article is neither fortunate or unfortunate. It
is well written and helps me to understand possible taxation treatment
when I go to sell my LINN in my SEP. In my case everything I withdraw
is taxable income so what does it matter? My CPA is even fuzzy on UBTI.
Ken The recapture as you read it is the total depreciation
and deletion claimed when you sell an MLP in an IRA account? You said
you could count all your negative UBTI against the recapture I think. To
count your negative UBTI do you have to fill out a form T-990 each year
or can you wait until you sell the MLP which could be 10-20 years?
I received my first k-1 this year from LGCY inside my ROTH. I
did not report anything because Box 20 Code V (UBTI) showed a negative
amount. I understand that I only report this if this amount is over
$1000. Since it was not, do I have to worry about reporting values in
Box 1-3 that show ordinary income/dividend? From my findings people say
to ignore these and simply look at UBTI when inside an IRA.
I need to ask, for years my UBTI is always a negative (no
income) on my shares of LINE. This means when I sell, there is no
recapture OR does it mean I need to claim that as a positive at the time
of sale?
I have held LINN stock in my ROTH for 5 years and have never
had to pay any tax. In 2012, I earned $2,000 in dividends and paid no
tax. I am happy with LINN and have no intention of selling. Great
article, Analytical.
Second,
since your distributions, over five years probably approach $10,000
you, or your heirs will succumb to UBTI. And this amount is building.
Eventually the tax man will get his due.
I hold a significant portion of my ROTH in MLPs. I have had
since 2009. I have net negative UBTI every year. Only one of my MLPs
had positive MLP (MMP). Many G&P MLPs have UBTI.
The
discussion about tax advantaged investments in retirement accounts
usually takes up annuities and financial advisors with no scruples
pushing retirement account investors into annuities.
The case for
MLPs becomes more interesting in the sense that you have an investment
that grows its income quarter over quarter. I have MLPs generating
double-digit yield to cost distributions and one with 25% yield to cost.
If there is a better income generating investment for my ROTH
IRA I haven's found it and I do look because none of us can afford to
rest on our laurels.
Keep
track of your negative UBTI and suspended losses. You will need them
when, and if, you ever sell any units. (of course since they are in an
IRA you, or your heirs, will be forced to liquidate at some point)
From
what you say, you are facing down a significant UBTI tax problem when
you sell these units. These "suspended losses" can help reduce the tax
bite, but most MLPs don't keep records of them.
It would be nice if they did. I know that EPD and LINE don't.
They
simply say that if you have them be sure to use them. A while back one
reader said he spoke with one of them and complained. They answered that
they don't have the capability to track them
Maybe it will change, maybe for some it already has, but not for mine.
An interesting new disclosure from E-trade, just made available (found on another board):
Etrade's new policy changes-
8.06
Investment of Amounts in the IRA – You have exclusive responsibility
for and control over the investment of the assets of your IRA. All
transactions will be subject to any and all restrictions or limitations,
direct or indirect, that are imposed by our charter, articles of
incorporation, or bylaws; any and all applicable federal and state laws
and regulations; the rules, regulations, customs and usages of any
exchange, market or clearing house where the transaction is executed;
our policies and practices; and this agreement. After your death, your
beneficiaries will have the right to direct the investment of your IRA
assets, subject to the same conditions that applied to you during your
lifetime under this agreement (including, without limitation, Section
8.03 of this article). We will have no discretion to direct any
investment in your IRA. We assume no responsibility for rendering
investment advice with respect to your IRA, nor will we offer any
opinion or judgment to you on matters concerning the value or
suitability of any investment or proposed investment for your IRA. In
the absence of instructions from you, or if your instructions are not in
a form acceptable to us, we will have the right to hold any uninvested
amounts in cash, and we will have no responsibility to invest uninvested
cash unless and until directed by you. We will not exercise the voting
rights and other shareholder rights with respect to investments in your
IRA unless you provide timely written directions acceptable to us.
You
will select the investment for your IRA assets from those investments
that we are authorized by our charter, articles of incorporation, or
bylaws to offer and do in fact offer for IRAs (e.g., term share
accounts, passbook accounts, certificates of deposit, money market
accounts.) We may in our sole discretion make available to you
additional investment offerings, which will be limited to publicly
traded securities, mutual funds, money market instruments, and other
investments that are obtainable by us and that we are capable of holding
in the ordinary course of our business.
If the investments held
in your IRA generate $1,000 or more of "Unrelated Business Taxable
Income" within the meaning of Section 512(a) of the Internal Revenue
Code ("UBTI"), your IRA may owe a tax under Section 511 of the Internal
Revenue Code. You understand and agree that you will be solely
responsible for obtaining all information necessary for determining
whether your IRA is required to file a Form 990-T for each tax year and
all information needed to properly complete and file a Form 990-T for
such tax year. Furthermore, you agree to prepare or have prepared the
required Form 990-T tax return, and any other documents that may be
required, and to submit them to the Custodian for filing with the IRS,
at least 5 business days prior to the date on which the return is due
for such taxable year, including an appropriate payment directive
authorizing the Custodian to pay the applicable UBTI from your IRA. The
Custodian will then file the Form 990-T in accordance with your
instructions. You agree to indemnify the Custodian from any claims that
may arise relating to the Form 990-T.
You understand and
acknowledge that the Custodian will assume that either (a) your IRA has
not generated UBTI or (b) you have independently filed the Form 990-T if
the Custodian is not provided the Form 990-T and payment directive
within the time period specified in Section 8.06 for the applicable tax
year. You agree that, if your IRA holds assets that generate UBTI, your
IRA at all times will contain sufficient funds to pay any tax imposed on
the UBTI as the time this tax obligations becomes due, and that, if
necessary to satisfy such obligations, you will liquidate assets or
contribute sufficient amounts to your IRA (even if your contribution
constitutes an "excess contribution"). You further agree that, to the
extent funds are not available, the Custodian is authorized to liquidate
any investments in your IRA necessary to generate the funds needed to
satisfy your tax obligation. You understand and acknowledge that, in
cases where the annual federal tax due is more than $500, the IRS
requires that quarterly estimated tax payments be made. You understand
and acknowledge that the Custodian will make such quarterly payments on
behalf of your IRA only if you direct us in writing to make these
payments, and if you notify the Custodian of the amount you wish to have
paid each quarter.
I called Charles Schwab this morning and they actually set up a
spreadsheet on your account, and if it (the IRA) has MLPs, they will
send the owner a letter in early February requesting the K-1s. Sometime
around April 1st (when all the K-1s presumably have arrived), they will
contact the owner if any taxes are due and obtain the payment
information (process is the same as E-Trade describes above).
They
will also file a 990-T if the UBTI is negative, and track it year-year.
She was not able to answer whether the UBTI is cumulative year-year, or
just for each separate MLP.
Schwab does this "because they are required to" and does not charge for the filing.
The world is closing in on
the UBTI issue. All the financial institutions and the MLPs themselves
are starting to "caveat" the whole area.
Recapture UBTI has been a
"sleeper" for a long while, but they are wising up to their potential
liability as providers. Hopefully these kind of discussions will wake
the SA readers up and bring them awareness.
RK, Many have asked, on various articles on SA, and other
Boards, for investors who have paid taxes on sale of MLPS in IRA. to
come forward, and confirm such. With close vigilance. I have never seen
anyone post on such. have you ever done it, or know anyone who has? why
no responses?
There was a post to a previous article that gave the statistics , direct from IRS, of the UBTI paid on IRAs.
I don't remember all the details, but they were in the thousands of taxpayers and I think the average tax was around $6,400.
I'll try and hunt it down for you. Don't hold me to the above numbers.
I've also had communications from MLP owners that have paid these taxes.
Frankly,
anyone can say they did or did not pay. I wouldn't rely on it one way
or the other. I know some of those that keep pushing the point and I
view it as a smokescreen.
If the IRS instructions to 990-T aren't
enough, if the IRS Audit Guide (provided in a earlier article) isn't
enough, if the Code isn't enough, if the Regs aren't enough, if the Tax
Attorneys at Tax Package Support isn't enough, then I can't see how
unsupported statements (for or against) can provide the comfort level
you're looking for.
You see, instead of pressing that issue, I'd
simply ask the naysayers to provide ONE, just ONE piece of authority
(opinion is not authority, hearsay is not authority) to discredit the
information.
I may be simple-minded in this, but I sort of think
our system of rules/regulations presumes that one side presents it's
case and the other side presents their case and the verdict is rendered.
It's not ... one side presents its case and the other side says "liar, liar pants on fire".
Well I sold 1000+ shares of LINE in Nov 2012. Held it in an
IRA for 2 yrs. Meet with accountant tomorrow, K1's in hand.
Will know damages (if any) from IRA well before April 15.
Some
people waste 100's of thousands of dollars in tuition at a name brand
University to get a useless degree. I sure don't mind paying a couple
grand to cut through all the opinions and finally get an actionable
answer to the whole question.
Make sure you show your CPA the supplemental sales schedule.
That's where the recapture is provided. He'll need to file a 4797, a 990-T and a 751 statement for the sales.
Also, show him the non-resident state income schedules so you can be sure to file in each state as appropriate.
Don't
forget to bring all your prior K-1s with you. He will need to compute
your cumulative suspended losses to offset some of the UBTI. LINE
doesn't provide it.
If he has any questions, the people at Tax Package Support are very helpful.
My guess is that a couple of grand in costs, is probably just about right.
Having purchased my 1st MLP in '72 (disposed of it in '92), I
suggest readers listen to Reel Ken regarding tax implications. (FWIW, I
took an initial position in LNCO today in a Roth IRA.)
Does anyone know someone whom has had to pay to the IRS -- the
UBTI taxes out of their accounts, regardless of whether it was IRA --
ROTH -- or Taxable? Does anyone have any personal experience of having
to pay UBTI ? I read of many articles talking about it-- I've not read
anything from someone whom has paid. Is there a link I could be directed
to from someone with this experience -- I'm looking at 11K in
distributions from KMP this year (2013), if my Quicken program is even
close to correct. Thanks
It's amazing how every time UBTI comes up
this exact question appears. In fact, it now appears three times within
this article. I could say yes or I could say no. Do you believe me or
not.
Here's the answer I gave GD...
There was a post to a previous article that gave the statistics , direct from IRS, of the UBTI paid on IRAs.
I don't remember all the details, but they were in the thousands of taxpayers and I think the average tax was around $6,400.
I'll try and hunt it down for you. Don't hold me to the above numbers.
I've also had communications from MLP owners that have paid these taxes.
Frankly,
anyone can say they did or did not pay. I wouldn't rely on it one way
or the other. I know some of those that keep pushing the point and I
view it as a smokescreen.
If the IRS instructions to 990-T aren't
enough, if the IRS Audit Guide (provided in a earlier article) isn't
enough, if the Code isn't enough, if the Regs aren't enough, if the Tax
Attorneys at Tax Package Support isn't enough, then I can't see how
unsupported statements (for or against) can provide the comfort level
you're looking for.
You see, instead of pressing that issue, I'd
simply ask the naysayers to provide ONE, just ONE piece of authority
(opinion is not authority, hearsay is not authority) to discredit the
information.
I may be simple-minded in this, but I sort of think
our system of rules/regulations presumes that one side presents it's
case and the other side presents their case and the verdict is rendered.
It's not ... one side presents its case and the other side says "liar, liar pants on fire".
RK, Good Morning! The regs, are the Regs--what a mess!
My desire is to hear from several people, w/ real world experience
paying the "Tax", or not, how, and why, with actual experience, whether
they are in compliance w/ your opinion, or not. Already talked to 2
CPA's, who were not helpful! Did not feel like paying for their
education on the issue. I'm not afraid to pay a competent CPA, or trying to avoid paying a tax. Just want real live experience?
Interesting. You want to ignore the plain
language of the IRS in the instructions for form 990-T and the Tax
People at Tax Package Support, to name a few. Instead you hunger for
hearsay.
This is even more telling, as you acknowledge that your
CPAs have trouble understanding what should be done, but some lay
person, who may or may not have filed correctly is of value to you.
Now, to shed some insight. Taxpayers will fall into one of two groups....
1)
Those that understand the instructions provided by the IRS and their
MLP and have filled out the forms and paid the tax. Put me in that
group. On the other hand, since you have trouble believing all the other
source material I provided, then I guess you have trouble believing
this too.
2) Those that can't or choose not to understand the
instructions and don't file. In essence those that play the "audit
lottery". By the way, as you can guess from the ratio of comments on SA,
this is easily the majority.
For those that fit into category
2)... they mostly get away with it. This is because the recapture
amounts are only reported to the taxpayer by the MLP with instructions
to file 4797. Recapture is not provided to IRS on the K-1 or any other
form.
This is changing as the MLPs and B/D's a have new reporting requirements.
The
only confirmation you can receive of any real value would be a THIRD
group---- those that have filed 990-T or 4797 with IRS and had the IRS
return the form saying there is no tax. Good luck with that one.
Reel OK lets try from a different direction. I'm looking
for experience. Perhaps I will get my answer from my own Tax Accountant
-- I just sent him about 7 pounds of tax information for 2012. My wife
has 930 shares(units) of KMP in an IRA, 430 ROTH, and 100 between she
and I. I have only 600 in an IRA. I think UBTI is limited per account,
also, per tax-payer, to 1K. Am I right --so far? I always file late, I
always pay a penalty for under with-holdings, and I always get mad at
the IRS. I do pay my Accountant very well, close to 2K each year to put
my tax-return in order. This year is different -- wife and I retired
together in 2011 --- and moved a great deal of funds into MLP's middle
to late 2011, the tax year 2012 will be a full year of MLP income ---
and I'm a lit worried about that UBTI "thing". Experience will be an
answer, perhaps. Don't know a way to keep you posted about this tho -- Anyway - Thanks ya'll
"The only confirmation you can receive of any
real value would be a THIRD group---- those that have filed 990-T or
4797 with IRS and had the IRS return the form saying there is no tax. "
The
IRS doesn't receive enough info to know whether tax might be due or
not... they don't receive the suppemental sales schedule figures.
Is the money you moved into MLPs in 2011 in IRAs or taxable. Taxable accounts don't have UBTI.
If it's in IRAs, I would swap out the KMP for KMR. I would also do it in the taxable account.
You
need to look at the whole issue, buyt there is no question in my mind
that, KMR works better than KMP. It will also take 4 pounds of your
"little tax bundle".
The IRS might receive more in the future, but
I don;'t think the IRS gets anything more than the K-1 now. Computing
basis and taxes due is still left up to the unit owner, and as you can
see, there is a LOT of uncertainty on MLP tax matters, even at the
IRS...
As for records, well, I keep all my stock buys and sells
in word docs. I can go back 20 years if need be to show how I
calculated my basis. I also keep every K-1. I even declare my
options income, and I know the IRS doesn't get that info yet.
If
I ever get audited, one of my old bosses (who paid me under the table)
is the one who should be very afraid... she doesn't know I declared all
that under the table money on my tax returns....
@giorgiolb, me too on being scrupulous on reporting every
scrap of income. I've always believed it's how to keep out of *real*
trouble with the IRS. Things like these MLP muddy tax laws can always be
smoothed over, but under-reporting income is a black-and-white issue.
Not that your friendly IRS auditor will understand the MLP stuff any
better than you. I just went through an IRS "inquiry" for a prior-year
return with an MLP sale (in a non-tax-advantaged account) and I'm pretty
confident the IRS agent didn't know how to account for any of it.
And,
no, the IRS doesn't get any of the supplemental info on MLP sales. I
remember reading that options sales will be reported to the IRS
beginning with this tax year.
Yep. The fact that the IRS even requires a 751 statement leads me to believe there's a lot of blind leading the blind going on.
Turbotax
doesn't even generate a 751 statement. I prefer to e-file my tax
returns, so I typed my 751's onto the one blank form permitted by
turbotax. That clearly isn't the best way, but it appears to be the
only POSSIBLE way to e-file my entire return, all at once.
So
while Reel Ken's correct about the requirement, it doesn't appear to be a
very big priority at the IRS... or at Intuit, for that matter.
Sometimes the easy way out is best, but in this case, there seems to be no clear cut answers, even among CPAs....
..the
answer is simple, congress needs to simplify the tax code, otherwise, a
legion of tax attorneys and your CPA firm will continue to reap the
benefits....
If the family trust is revocable and the beneficiaries report on the same ID#, no change.
If
the trust is irrevocable and has a separate ID#, then it would be a
gift. I don't see a problem, outside of normal gift trust issues your
attorney would advise you about.
Reel Ken and alschroed: The 2 years I owned LINE in my
Roth, the negative UBTI far exceeded the distributions. Does this mean,
if I sell now (1) there is no reportable UBTI in respect to the sale,
and (2) I won't even need to complete the T-990? Thanks
Recapture is a direct function of depreciation. The negative UBTI probably indicates that your depreciatin exceed the income.
You will still have recapture, but keep track of the negative UBTI, as it should be able to reduce your recapture UBTI.
Check your holding out wth Tax Package Support (http://bit.ly/HMDorz)
and search for the tax calculator. That will approximate your
recapture amounts. Just be sure to subtract your neg-UBTI, as it
probably ins't concluded.
So I bought and sold tons of LINE last year but never held it
through a distribution. Made a good living doing it. I got my K1 and
it shows a negative UBTI of over 100,000 dollars. How can this hurt me?
Ken, section 512(b)(5) of the Internal Revenue Code excludes
gain from UBTI unless it is from inventory property. Section 512 is the
section that defines UBTI. Given that exclusion, not sure how
recapture from sale of partnership unit is UBTI
I know this isn't an MLP tax forum but it seems like we have
lots of people with knowledge so I thought I would ask about what
happens when I give MLP units held over a year (i.e., long term) away
either to:
1 - a 501c3 charity - do I get to deduct the current
market value at time of donation and when the charity sells the units do
they end up paying the recapture tax OR do I only get to deduct the
written down value of the units?
or
2 - my daughter who
is in a much lower tax bracket (15% bracket) who then sells them and
then pays the recapture tax at her lower tax rate. Related to this is
what is the value of the gift (i.e., we want to give her our annual
exclusion $28,000) - is it the current market value of the depreciated
value?
The rules are that MLP's with a low basis are an "ordinary
income recapture event" waiting to happen. You can still donate MLP's
(like stocks) to avoid paying capital gains taxes on any embedded
capital gains, but the ordinary income deferral comes due also.
Effectively, your charitable write off is limited to the unit
appreciation over what you paid for the units (which is different from
your tax basis). If there is ordinary income that has been deferred, you
are liable for that at the time of the donation.
Treatment upon charitable donation Question: “Is an MLP an ideal asset for charitable donation?” Answer: Probably not.
Donating
an MLP to a charity may not be the ideal strategic approach for a
taxpayer to take. Although the tax code permits a client to make a
charitable contribution of MLP assets, the actual amount of the
charitable deduction will be reduced by the amount of depreciation
deductions that would have been subject to recapture (and subject to tax
at ordinary income rates) upon donation.
However, in most
cases, the fact pattern that arises is that taxpayers will own MLPs for
many years and consider donating them only after their basis has
declined substantially and is at, or near, zero. At that point, the
value of any charitable donation will generally be substantially reduced
due to the impact of the above rule.
Tip: Charitable entities
that receive MLPs as a result of a donation should also carefully assess
whether or not they wish to divest themselves of the asset or continue
holding it and risk exposure to the potential tax consequences
associated with UBTI.
Tip: Clients seeking to make a charitable
donation to a tax-exempt entity can normally obtain a superior tax
result by gifting an asset other than an MLP from within their
portfolio. Working with a tax advisor can normally provide the best
insight regarding which investments might prove to be the appropriate
candidates for philanthropic giving.
You cannot deduct the full FMV. You have to
reduce it by any recapture that you would have incurred had you sold
them prior to donating. I don't know what happens when the charity sells
them, but I would deduce they don't have to realize recapture at that
juncture. You, in effect, have.
A donee's basis depends on the FMV and your basis. It has many possible outcomes.
I'm a corporate tax guy, and a bit fuzzy on the whole MLP area
of investing, but anxious to learn more. This discussion has been
great.
I have two simple scenarios, both in after-tax accounts:
1.
Tax basis in LINE (or any MLP) is approaching zero, and taxpayer is
considering adding to his basis (buying additional units) in 2013 to
avoid capital gain treatment required on distributions when your tax
basis is zero. I know the K-1 is a cumulative basis of all units held,
but would the IRS expect the basis to be tracked on a lot by lot basis?
If so, would it then be better to sell all units, and buy back the next
day and create a new basis and lot? His sale would generate a large
income recapture, plus a capital gain that would be due sometime in the
future either way - only pulling them into 2013, but would avoid the
double taxation of "negative" basis. He also is currently in the 15% tax
bracket.
2. Is the 751 statement required for MLP sales in all
accounts, or only for IRA accounts? The link above suggests not if
covered by a 1099-B, which is any after tax account