Want Tax Efficiency? Consider MLPs | ETF Trends

The Ides of March became synonymous with a sense of foreboding thanks to Shakespeare’s Julius Caesar, but the Ides of April can carry a similar aura of dread for many taxpayers. Chances are you won’t get stabbed on a Senate floor by a coalition of former friends and allies on April 15th, but if your portfolio isn’t tax efficient, then your returns could be in danger. MLPs are known for their robust dividends, but their secret strength is the tax efficiency of those dividends. 

According to VettaFi head of energy research Stacey Morris, “MLP income is often tax-deferred, which means you receive a distribution but don’t pay taxes on it until you sell the position.” MLPs are pass-through entities and get special tax treatment due to the nature of their business activities.  

The ETF wrapper makes MLPs an even more compelling proposition, because they issue a Form 1099, a significantly easier form to work with than the K-1 that investors who own MLPs directly must work through when completing their taxes. Morris noted, “For an MLP or MLP ETF, there can be times when part of the distribution is not a return of capital. That portion of the distribution would be a qualified dividend for an MLP ETF and taxed at long-term capital gains rates. If you directly own an MLP, the portion of the distribution that is not considered a return of capital is taxed at ordinary income rates with a 20% qualified business income (QBI) deduction.” 

With MLP’s offering yields around 8% and with their compelling tax advantages, investors motivated to learn more can register for an upcoming 30-minute LiveCast hosted by the experts at ALPs and VettaFi on April 11 at 12:30 PM ET called “MLPs 101: Dividends, Tax Efficiency, and More.”  

For more news, information, and analysis, visit the Energy Infrastructure Channel.