just wondering if my Turbotax will handle a MLP
and the K1 data issued ?
Basically as you hold your shares you pay taxes only on the earnings of the
partnership, just as you would if you were a partner in any private
business. You do not pay taxes on the dividends or any other events, but
they do affect your cost basis. The distributions you receive will lower
your cost basis, and thus increase your capital gains when you sell later
on. But all of this is at the LTCG rate.
The following events will modify your cost basis as you own the units.
1. Distributions (dividends) will lower the basis.
2. Annual taxes paid on your portion of earnings will raise the basis.
3. Your share of the business's depreciation will lower the basis.
You do have to pay some of the final gains as ordinary income, but only the
gains that came from depreciation. The distributions and stock price
increases are paid at LTCG.
Here is an example for everyone that hopefully makes it simple.
1. Purchase shares at $100.
2. Receive distributions of $5 (reducing your basis to $95).
3. Pay taxes on earnings of $3 (increasing your basis to $98).
4. Your portion of depreciation is $1 (reducing your basis to $97).
5. You sell your shares for $105.
After selling the shares, you will owe LTCG on $7 and ordinary income on $1.
And you already paid ordinary income of $2 (after deducting depreciation)
while holding the shares.
So you bought the shares for $100, received a $5 profit from selling and
received $5 in distributions. Of your $10 profit, you paid LTGC on $7 and
ordinary tax rates on $3.
Most MLP's will try to strive for 80% of the investment being tax-deferred.
This makes them nice holdings in taxable brokerage accounts.
- posted 8 years ago