Hello, I have read many posts on KMP taxation & Distributions:
I would like to see how it plays out on a working example:
I bought 50 units at 69$ = 3450 $ total
It currently yields 1.16$ per unit on a quarterly distribution.
For 2011 I gained 116$ in distribution.
1. How is this reported on my 2011 tax form? How much tax do I pay?
Given the current stock price is roughly 89$. If I sold all 50 units to I just pay taxes on the 20$ per unit gaine = 1000$???? If so at what rate?
I am getting confused about the cost basis and going to "zero" ectt..
Thanks all for your help!! Im a newbie at MLP's
I hope PSHONORE answers this as I want to know too. You now have distributions in excess of basis which must be taxed at long term capital gains rates. However there are several points I am unclear about.
questions for PSHONORE:
-is that capital account information the only think that shows you had distributions in excess of basis, or is there some box code in the K-1 that gives it?
-does the IRS know you received distributions in excess of basis?
-does Turbotax automatically create the entries for the amount to be taxed as LTCG or do you have to manually create a schedule D entry yourself?
I own 5 MLP's. I use turbotax. Just follow the instructions and insert the amounts KMP sends you in the K-1. I have not sold any shares in 4 years. I have not paid any taxes on any of them, I have a lot of depreciation and interest built up for deductions, TT keeps a running compilation and brings everything forward each year. I appreciate all the good examples on this board, I have a Phd in finance, I've gotten to dog gone old to do them by hand. But I use to.
If you bought 50 shares you received $58.00 as a partnership distribution. So your current basis is $68.42 per share (plus commission paid). However, if you've only received one distribution and you sell it, the entire profit is a short-term capital gain (held less than 1 year) and subject to ordinary income tax rates. $20.58 per share profit times your effective tax rate. An aside to others--KMP has not reported a taxable event on the K-1 in the last twelve years. Also, the K-1 is available now on their website.
Answer from Tax Preparer.
Don't try and figure this out. Just copy the numbers into the boxes. I work for HRBlock and our form looks just the same as the K1. We fill in the numbers and get the info we need from the K1. Box 1 shows a loss. You are getting some of your money back so your original basis keeps getting less and less. So you will have more of a profit when you sell.
I'll try to treat this question as a theoretical quiz, and not get so serious and technical about it that I am immobilized and unable to answer. Practice makes perfect. Lets keep these issues fresh in our minds all year.
Box 1 of Part III of your K-1 will show a loss, therefore the cash distributions you received will be non-taxable, since they are (for the most part)a return of capital. Any interest income shown in Box 5 will, however, be currently reportable by you on the return you file for 2011. Thats it as far as your 2011 income tax return. Save all the K-1's you receive, and keep each year for as long as you own the MLP.
If you sold your units in 2012 for $89, and received no distributions in 2012, then you'd only have the gain to deal with. Of the $116 distributions you received in 2011, assume that $16 was interest income and $100 was return of capital. Your basis in KMP will be reduced $100 to $3350. At $89 per unit, your sale proceeds would be $4450, and your gain would be $1100.
Assume that your Unrecaptured Section 1250 Gain (depreciation recapture) is $50. Then, of your $1100 total gain, $50 is taxable as ordinary income and $1050 is taxed at lower capital gains rate. That's it as far as taxation.
Tax return filing is just around the corner. Stay cheerful.
Box 1 showing a loss has nothing to do with distributions being tax deferred. As long as your basis is greater than zero, distributions are tax deferred period. (If box 1 showed a gain you owe tax on that however.)
Items of income (interest or box 1 earnings ) increase your basis, items of expense (box 1 losses) and distributions decrease your basis.
We cannot calculate his basis without knowing the box 1 loss. You are correct that some portion of his gain will be recaptured as ordinary income and KMP will tell him how much.
One other important point - when you sell, all the box 1 losses from previous years go on Schedule E as negative numbers and "square things up"