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Thousands hit with surprise tax bill on income in IRAs
Article can be found on yahoo. I was wondering if any MFOers were hit with this (taxing) ? Seems if you held kinder morgan in ira you may have a tax bill due along with a penalty ! Derf
It should not be a surprise. Going from an MLP to a C corporation, it became a new entity. You should know what you own. From the WSJ:
The largest, Kinder Morgan Energy Partners (KMP), had 465 million units with a market value of $47 billion last year. Individual investors liked its high payouts and that taxes were deferred.
In 2014, the parent firm did a roll-up of the MLPs that triggered long-postponed taxes for many holders and generated UBIT for many investors holding units in IRAs
The penalty should be a surprise, the tax should not. As the WSJ points out, the custodian is responsible for timely filings, and so the IRS should be amenable to waiving penalties. Given the additional paperwork (and apparently, research) that the custodian must do, I wonder if IRA custodians should start charging a fee for IRAs that holds MLPs.
MLPs provide both reduced taxes (they're pass through entities, taxed only once, like mutual funds or REITs) and deferred taxes (by allowing depreciation to offset gross income). But just as with annuities (that also have benefits beyond tax deferral), using MLPs inside of IRAs rarely seems to make sense to me.
The taxes on these MLPs are due because the old investments (the MLPs, e.g. KMP) were dissolved - as if you sold off shares. Didn't really matter whether they became new entities or just cashed out.
I don't really understand the attractiveness of the deferral in a taxable account, because those taxes are going to come back to haunt you (unless you die or gift shares). And most of those taxes will be at ordinary income tax rates (to the extent that the depreciation was used to reduce recognized income in prior years).
I'm guessing that it's only this portion of the income that is treated as UBTI. Any remaining appreciation (if any) on shares seems like simple cap gains, no different from gains on shares of a C corp in an IRA.
An MLP tax break comes from a special section of the tax code (IRC 7704) that seems to have been written specifically for the oil and gas industry. Especially as subsequently clarified (excluding other energy sources like wind and hydro). Getting rid of this tax break (as was done for most other LPs in 1987) would simplify the tax code and remove a bias toward fossil fuels (or away from renewables/inexhaustables).
Comments
The largest, Kinder Morgan Energy Partners (KMP), had 465 million units with a market value of $47 billion last year. Individual investors liked its high payouts and that taxes were deferred.
In 2014, the parent firm did a roll-up of the MLPs that triggered long-postponed taxes for many holders and generated UBIT for many investors holding units in IRAs
MLPs provide both reduced taxes (they're pass through entities, taxed only once, like mutual funds or REITs) and deferred taxes (by allowing depreciation to offset gross income). But just as with annuities (that also have benefits beyond tax deferral), using MLPs inside of IRAs rarely seems to make sense to me.
The taxes on these MLPs are due because the old investments (the MLPs, e.g. KMP) were dissolved - as if you sold off shares. Didn't really matter whether they became new entities or just cashed out.
I don't really understand the attractiveness of the deferral in a taxable account, because those taxes are going to come back to haunt you (unless you die or gift shares). And most of those taxes will be at ordinary income tax rates (to the extent that the depreciation was used to reduce recognized income in prior years).
I'm guessing that it's only this portion of the income that is treated as UBTI. Any remaining appreciation (if any) on shares seems like simple cap gains, no different from gains on shares of a C corp in an IRA.
An MLP tax break comes from a special section of the tax code (IRC 7704) that seems to have been written specifically for the oil and gas industry. Especially as subsequently clarified (excluding other energy sources like wind and hydro). Getting rid of this tax break (as was done for most other LPs in 1987) would simplify the tax code and remove a bias toward fossil fuels (or away from renewables/inexhaustables).
WSJ blog, August 12, 2014: Q&A: How the Kinder Morgan Deal Affects Investors’ Taxes
http://blogs.wsj.com/totalreturn/2014/08/12/qa-how-the-kinder-morgan-deal-affects-investors-taxes/