State tax implications for Master Limited Partnerships (MLPs) - anyone know the rules?

While MLPs can be attractive investments for their yield and tax-deferred distributions, you're right that the tax complexity is substantial - especially at the state level. From my experience working with clients who hold MLPs: 1. Technically, you're required to file in any state where the MLP operates and apportions income to you. In practice, many states have minimum filing thresholds (often around $1,000 of income), and many small investors don't file for minimal amounts. This is a compliance risk, but enforcement for small amounts is typically low. Still, you're legally obligated to file if required. 2. Return of capital distributions are generally treated similarly across federal and state taxes - they reduce your basis but aren't immediately taxable until you sell or basis goes negative. Most states follow federal treatment here, but there are exceptions. 3. For MLPs in IRAs, the custodian should handle filing Form 990-T for Unrelated Business Taxable Income (UBTI) exceeding $1,000. They typically handle both federal and state filings, but the multi-custodian issue is real - each custodian only knows about their own accounts, so you could exceed the threshold collectively. In that case, technically you would need to ensure proper filings. 4. Return of capital itself isn't UBTI, but if the MLP generates UBTI (operating income), that flows through regardless of how they classify distributions.

After dealing with the tax nightmare from owning MLPs for years, I found https://taxr.ai incredibly helpful for sorting out all the K-1 madness. I was in a similar situation - owned Energy Transfer and a couple other MLPs and got completely lost trying to figure out the state tax implications. The platform basically analyzed all my K-1s and identified which states actually required me to file based on my specific situation. Turns out I only needed to worry about 3 states rather than the 15+ where the MLPs operated because of various thresholds and exemptions. It saved me from either overfiling or potentially missing required filings. The tool was especially helpful with figuring out the return of capital adjustments to my basis and tracking those changes year over year. Before finding this, I was spending hours trying to reconcile everything manually.

Just wanted to follow up about my experience with taxr.ai after the recommendation here. I was skeptical at first since I've been burned by tax software that claims to handle complex situations but falls short. I uploaded my K-1s from the MLPs in both my taxable and IRA accounts, and it actually identified that my combined UBTI across my Fidelity and Vanguard IRAs was going to exceed the $1,000 threshold, which neither custodian would have caught on their own. This let me proactively contact both to ensure the proper 990-T filings happened. It also clarified which of my distributions were actually return of capital vs. ordinary income, which helped me understand my true tax situation. For my taxable account MLPs, it narrowed down my state filing requirements to just 3 states where my allocated income exceeded the minimums. Definitely worth it for MLP investors.

If you're struggling to get through to the IRS about MLP taxation issues (which I was for MONTHS), I discovered a service called https://claimyr.com that actually got me connected to a real IRS agent after weeks of failed attempts. You can see how it works here: https://youtu.be/_kiP6q8DX5c When I received K-1s showing negative income from MLPs in multiple states, I had specific questions about my filing obligations that weren't covered in any publication. I tried calling the IRS directly for weeks but kept getting disconnected or told to call back later. Claimyr got me through to an agent within a day, and they confirmed that while technically I needed to file in states with losses, there were practical thresholds where the IRS wouldn't be concerned about compliance. The agent also clarified how the UBTI rules work for MLPs in IRAs across multiple custodians, which was incredibly helpful for planning purposes.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate to talk to someone about my MLP situation in my IRA. Not only did I get connected to an IRS agent within a couple hours (after trying for weeks on my own), but the agent was able to walk me through exactly how to handle the UBTI situation with my multiple IRAs. They confirmed that while each custodian is responsible for filing Form 990-T if UBTI exceeds $1,000 in their specific accounts, I needed to notify my custodians if my overall UBTI across all accounts exceeded the threshold. They also explained the practical reality of state filing requirements for small MLP investments, which saved me from potentially filing unnecessary returns. I'm still dealing with the complexities of MLPs, but at least now I have clear direction on how to proceed.

I've been investing in MLPs for about 5 years now and here's my practical approach to the state tax issue: 1) I only file state returns where my allocated income from the MLP exceeds $500. This is technically not compliant with every state's rules, but it's a reasonable threshold where the tax liability becomes meaningful enough to justify filing. 2) For states with small allocations, I maintain records in case of audit but don't file. So far, no issues. 3) For MLPs in IRAs, I specifically choose ones with historically low UBTI to avoid triggering the $1,000 threshold. Enterprise Products Partners (EPD) has been good for this. 4) I keep detailed basis records for return of capital distributions, as these will eventually matter when I sell. Not saying this is the "correct" approach legally, but it's worked for me as a practical compromise between full compliance and sanity.

For anyone considering MLPs, please know that while the tax complexity is real, it's manageable if you approach it systematically. A few tips from my experience: 1. Request the "investor tax package" from each MLP you own - most provide detailed state-by-state breakdowns of your allocations 2. Focus on your home state plus any states with significant operations by your MLPs 3. Keep excellent records of your basis adjustments from return of capital distributions 4. Consider using an accountant experienced with MLP investments rather than DIY software 5. For small investments, ETFs that hold MLPs like AMLP might be more tax-efficient as they issue 1099s instead of K-1s