How The New Tax Laws Affect Investments In Energy MLPs

In brief, earnings from all types of capital gains and dividends or distributions are equally taxed higher.

What affect does the “fiscal-cliff relief” legislation of earlier this month have on investments in energy MLPs? Oil and Gas Investor asked the team at tax- and business-consulting firm UHY Advisors.

“With the American Taxpayer Relief Act of 2013…investors in energy MLPs will pay as much as 24% more on their ordinary income that flows through on their Schedule K-1s—43.4% versus 35%—among top-bracket taxpayers and up to 59% more in capital gains when they sell their holdings—23.8% versus 15%,” the firm reports.

The firm breaks out the ordinary-income—or income from distributions—increase this way:

--MLP ordinary income for top-bracket taxpayers with incomes of $450,000 or more (married, filing jointly) is now taxed at 39.6%.

--Taxpayers with adjusted gross incomes of more than $250,000 are now also liable for an additional 3.8% Medicare surtax on investment income.

=This brings the total tax on MLP-investment-related ordinary income for top-bracket taxpayers to 43.4%. This is 24% more than the 2012 rate of 35%.

As for the increase in capital-gains-related taxes, which kicks in only upon divestment of MLP units, the UHY Advisors team reports:

--On the sale of MLP units held for at least one year, taxpayers with $450,000 or more in modified adjusted gross income—that is, taxable income before itemized deductions and personal exemptions plus tax-exempt income—are now liable for a 20% long-term capital-gains tax, plus the new 3.8% Medicare tax.

=This brings the total tax liability on gains from the sale of long-term holdings of MLP units—or any other investment—to 23.8%. This is 58.6% more than the 2012 rate of 15%.

--As for short-term capital gains on investments, which are for those held for less than one year, these are taxed at the same rate as ordinary income, or 39.6% for top-bracket income earners.

The team adds, “Please note that, depending upon the MLP, some or all of the gain on a sale could be taxed as ordinary due to the recapture of certain deductions taken by the MLP against ordinary income.”

Net/net, while both ordinary-income and capital-gains tax rates on profits from investing in energy MLPs are higher, they’re similarly higher for profits from other types of investments, so investor appetite for units in energy MLPs should be unchanged as a result of new tax law.

More information is available from UHY Advisors.