Let's assume that someone exceeds the $1000 limit.
What will be the tax rate percentage applied to the excess? I assume that it starts at a very low percentage, and does not escalate until you've earned a substantial amount.
Also: can you offset over-limit gains on one MLP against UBTI losses on another?
I've got a couple of MLP's in an IRA that will "age-out" soon (meaning that I have received the full purchase price in distributions), so am I correct in assuming that any distributions beyond my cost will be subject to the UBTI tax?
Obviously, this is a not-well-understood area of tax law. Thanks for you comments.
I have been trying to find answers for the Mlp in my Roth IRA. I understood that if UBTI was over !,000.00 I would owe taxes on it but could not take a loss on the UBTI. I called the IRS for Clarification and was passed from one division to another. Finally, in the IRA division they said that the K-1 was for record keeping only and did not require payment of taxes. Noone including the IRS has been able to explain what the rules are, including the instruction that come with the K-1.
Your answer there is 100% wrong. To find out if you owe tax on UBTI is very simple. Add up the positive numbers from line 20V on all of your K-1s in your IRA. If over $1000 you owe tax. If 999 or less you owe nothing and do not need to file. The rate starts at 15% and at $2400 goes to 25%. It is a trust tax rates.
The statistics are that 50% of answers from IRS help lines are incorrect. You'd do just as well tossing a coin.
Yes, if UBTI is $1000, the IRA should tax tax. The relevant form is 990-T so you could look at the instructions on that form if interested. However it is the IRA custodian who files the form, not the individual account holder.
akpg_98: That's consistent with my understanding. If your IRA's net UBTI is under $1k, then it won't owe tax and there's effectively no penalty for not filing a 990-T. The instructions for the 990-T say that IRAs or Roth IRAs wiith over $1000 gross UBTI must file, and I don't see that the form allows for recovery of loss in any way. ie: the minimum taxable income is $0.
The K1 is to help individuals figure out what their share of the partnership's costs are. eg, my share of NRP's gross was $1100, my share of their expenses $1000, and my net UBTI $100. I could sort that out from their quarterly reports and my share number, but the K-1 is much easier.
I've been advised that, because IRS's statute of limitations clock begins when you file, it is better to file a return for $0 and start the clock than not to file and leave yourself permanently at risk.
I believe the rate starts out at 35% on any amount above the initial $1000. And no, UBTI should not be netted across multiple MLPs.
However note the $1000 is not distributions, it is UBTI (box 20V on the K-1). It is nothing to do with how much you received in distributions, so your second to last paragraph about the distributions being taxed is not correct. Note that most of the pipeline and midstream MLPs report negative UBTI and if so, you clearly will not be subject to UBTI.
The E&P MLPs as a rule tend to report positive UBTI.
However there are exceptions in both cases (a few pipelines reporting positive UBTI and a few E&Ps reporting negative).
You are right about it not being well understood and the area of UBTI recapture on sale is even more controversial.
Thanks for your informative reply. I'm familiar with the UBTI and line 20-V, and have been watching my K-1's for that part. All of my IRA MLP's are in pipelines, and there's only the occasional positive number on 20-V.
The "ageing-out" part still lurks. I've had some of then in the IRA for ten years or so, and pretty soon, I will have received all of the purchase price in distributions.
What are the implications of this situation? Hypothetical case:
Pipeline A: Bought for $25,000 in 2000. By the end of 2013, I have received $27,000 in distributions. Ending capital account (Line L) will go below zero. Difference equals $2,000.
Will the $2,000 be all UBTI? If so, will the tax be on the total $2,000, or will there still be a $1,000 threshold before tax begins, and the tax would then be levied on the excess $1,000?
All things being equal, it's my expectation that I will keep these MLP's in my IRA until I croak. It is my assumption that (under current tax law), the basis will step-up to current value, and the tax otherwise payable if I sold while I was alive will not be due. Is this correct, or is there a Gotcha! buried in there somewhere?
My CPA has been discouraging IRA MLP investments for some years now. I have resisted his thoughts because all of my MLP's - IRA account and regular account - have performed much better than any of my other stocks. I can stand a bit of a tax hickey if the investment performs well.
Just because someone is a reputable CPA does not mean that he is conversant with the arcane rules on MLP's.