State tax implications when investing in MLPs - filing requirements across multiple states?

Thanks for the detailed response! For state filing thresholds, are there any resources where I can look up each state's minimum? Also, do MLP K-1s typically break down exactly which states I'd need to file in, or is that something I need to calculate myself?

Most states have filing thresholds based on income sourced from that state, but they vary widely. The Federation of Tax Administrators (FTA) website has links to all state tax departments where you can find specific thresholds. Some states have minimum income requirements while others have minimum tax liability thresholds. The K-1 you receive from the MLP should include a state-by-state breakdown in the supplemental information section. Look for a statement that shows the apportionment of income/loss by state. This is typically provided on an attachment to the K-1 rather than on the main form itself. The MLP should do the calculation work for you.

How does it handle calculating the UBTI across multiple IRAs? I have accounts at Fidelity, Vanguard and a small one at Schwab, all with some MLP holdings. Do I need to upload statements from all of them for it to work?

I've heard about tax software that helps with MLPs but wasn't sure if it's worth it. Do you know if it helps with historic basis tracking? I've owned Enterprise Products since 2016 and have been manually tracking my adjusted basis which is becoming a nightmare with all the ROC distributions.

It lets you upload all your IRA statements regardless of custodian, then aggregates your total UBTI across all accounts. I connected all three of my IRA accounts (Vanguard, TD Ameritrade, and a smaller one at my credit union), and it calculated my combined exposure. This was crucial since no single account exceeded $1000 in UBTI, but together they would have. For historical basis tracking, absolutely! That's actually one of its best features. I imported my past K-1s going back to 2018 for Energy Transfer, and it reconstructed my entire basis history, including all the return of capital adjustments. It even flagged when my basis was approaching zero on one of my older positions. The time it saved me compared to my spreadsheet method was incredible.

How exactly does this service work? Do they just call the IRS for you? Seems weird that they could get through when regular people have to wait for hours.

I'm skeptical. I've dealt with the IRS for years and they almost never give clear answers on complex MLP questions. Most agents aren't trained on partnership K-1 issues, especially for state allocations. Did you actually get useful information that resolved your issue?

They use an automated system that navigates the IRS phone tree and holds your place in line. When they're about to connect with an agent, you get a call to join the conversation. It works because their system can stay on hold indefinitely while you go about your day. I definitely got useful information. You're right that not all IRS agents are partnership tax experts, but the service connected me to the Business Tax division where the agent was familiar with K-1 reporting. They clearly explained which parts of the K-1 affected my federal return and which were state-specific issues. They also directed me to specific IRS publications that addressed UBTI in IRAs with partnerships. It was far more productive than my previous attempts.

Did your K-1 each year tell you what your remaining basis was? Or did you have to track this yourself? I'm holding MPLX and wondering if I'm missing something in the paperwork they send.

You have to track it yourself. The K-1 shows the current year's return of capital distribution, but not your cumulative remaining basis. That's why it gets so complicated with MLPs - you need to keep a running total year after year. Some brokerages try to track cost basis, but they often get it wrong with MLPs because they don't account for all the adjustments properly. For MPLX specifically, look at Box 19A on your K-1 for "Distributions of cash and marketable securities" - that's typically where they report the return of capital portion. You need to subtract that from your basis each year. If you haven't been tracking it, you might want to go back through past K-1s and reconstruct your basis history before it becomes a bigger problem.

California is indeed one of the stricter states! They have a $0 threshold for filing requirements, meaning technically any amount of income sourced from California requires filing. However, they do have a de minimis exception if your only connection to California is through a publicly traded partnership (which MLPs are). According to CA FTB Publication 1001, you don't need to file if your income from all sources is below the filing threshold (around $19,310 for single filers in 2023) AND your CA-source income is $1,000 or less. So your $75 allocation should be below the practical enforcement threshold.

This is incredibly helpful context, thank you! The point about combining allocations across multiple MLPs for state thresholds is exactly what I was wondering about. I'm particularly interested in your mention of reviewing prior year K-1 supplemental information before investing. Is this something that's readily available on MLP investor relations websites, or do you need to specifically request it? I'd love to do this analysis for EPD and a few others I'm considering. The cost-benefit analysis you mentioned is sobering - $100-300 per state return could definitely wipe out distributions on smaller positions. Are there any rules of thumb you use for minimum position sizes to make the complexity worthwhile? I was thinking of starting with $5,000-10,000 positions but wondering if that's too small given the potential administrative costs. Also, regarding the energy infrastructure ETFs as an alternative - do you have any specific recommendations? I've seen MLPA and AMLP mentioned, but I'm not sure how they compare in terms of tax simplicity versus direct MLP ownership.

@d0d34e9d9c0c Most MLPs do make prior year K-1s available on their investor relations websites under "Tax Information" or "Distributions" sections. For EPD specifically, they typically post the K-1 and supplemental schedules showing state-by-state allocations by late February/early March. You can also find this info in their annual 10-K filings under partnership tax matters. For position sizing, my general rule is at least $15,000-20,000 per MLP to justify the complexity, assuming you might need to file in 3-5 states. With smaller positions like $5,000-10,000, you're right that administrative costs could eat significantly into returns. Some investors set a threshold of needing at least $500-1,000 annual distributions per MLP to make it worthwhile. For ETF alternatives, AMLP is probably the most established, but keep in mind it's structured as a C-corp so you'll get regular 1099-DIV treatment instead of K-1s. The trade-off is you lose some of the tax advantages of direct MLP ownership (like depreciation deductions) but gain massive simplification. MLPA is similar but smaller. There's also EMLP and YMLP worth considering. These funds handle all the K-1 complexity internally and just pass through regular dividends to you. The ETF route makes a lot of sense if you want energy infrastructure exposure without the administrative headache, especially for smaller allocations to the sector.

Great point about the safe harbor provisions - that's something I hadn't considered! Your spreadsheet tracking system sounds really practical too. I'm curious about your experience with state tax credits. Have you actually been able to claim meaningful credits that offset the filing burden, or is it more theoretical? Regarding MLPs changing their operating footprint, I haven't experienced that personally but it's a really good question. It seems like something that could create nasty surprises at tax time, especially if you're not monitoring their quarterly reports closely. Do the K-1 instructions typically explain when new state allocations appear, or do you just discover it when the numbers show up? This kind of unpredictability is another argument for the ETF approach that others mentioned - at least then the fund managers deal with these operational changes rather than individual investors having to track geographic expansions across multiple partnerships.

This is incredibly valuable perspective from a professional - thank you for sharing! The "trailing state" problem you mentioned sounds like a nightmare scenario I hadn't even considered. Getting amended K-1s years after selling that create new filing obligations is exactly the kind of complexity that makes me second-guess MLP investing. Your point about professional preparation costs really drives home the economics issue. At $150-250 per state return, even a modest MLP position spread across 4-5 states could cost $600-1,250 annually just for tax prep. That would wipe out a significant portion of typical MLP distributions. I'm curious about your experience with the amended K-1 situation - how common is this really? And when it happens, do clients typically have to amend multiple years of state returns simultaneously? The administrative burden seems like it could compound quickly. Your recommendation to start with one geographically concentrated MLP makes a lot of sense as a learning approach. Would you recommend EPD specifically, or are there others you've found to be more manageable for first-time MLP investors? The more I learn about this, the more the ETF route seems like the prudent choice for most individual investors, despite giving up some of the direct ownership benefits.

You've really captured the core dilemma that many of us face with MLP investing! I've been wrestling with this same cost-benefit analysis, and your point about ongoing liability even after selling is particularly concerning. I actually made the switch to AMLP about two years ago after dealing with the K-1 headache from holding EPD and Energy Transfer directly. While I did give up some of the tax advantages, the peace of mind has been worth it. The performance difference hasn't been dramatic - AMLP tracks the sector reasonably well, and when you factor in the tax prep savings (I was paying about $400/year for multiple state filings), the net return difference is minimal. The convenience factor is huge too. Getting a simple 1099-DIV instead of multiple K-1s with state allocations has simplified my tax situation enormously. No more tracking basis adjustments, no more worrying about filing thresholds in random states, and no risk of surprise amended K-1s down the road. For software solutions, I'd imagine they help with current year complexity but probably can't eliminate the fundamental issue of ongoing amended K-1 liability. That seems like an inherent risk of direct MLP ownership that no amount of automation can fully solve. Unless you're investing substantial amounts ($50K+) or really need the specific tax benefits of direct ownership, the ETF route seems like the more practical choice for most individual investors.

Great question about ETF distribution timing! I've held AMLP for about 18 months now and can share some observations. The distributions do come with a bit more lag compared to direct MLP ownership - typically 1-2 months after the underlying MLPs distribute. AMLP pays quarterly (March, June, September, December) while many MLPs pay monthly, so there's definitely a timing difference. The distribution amounts have been fairly predictable, though they do fluctuate based on the fund's holdings and any management decisions. One thing I've noticed is that AMLP's distribution coverage ratio tends to be more stable than individual MLPs since it's diversified across many partnerships. As for other hidden complexities with direct MLP ownership that haven't been fully covered - watch out for the depreciation recapture issue when you sell. All those lovely depreciation deductions you've been claiming over the years get "recaptured" as ordinary income (not capital gains) when you sell, which can create a nasty tax surprise. This applies even if the MLP has lost value! Also, some MLPs have debt-financed operations that can trigger additional UBTI complications in tax-advantaged accounts beyond what's been discussed. And if you inherit MLPs, the basis step-up rules are different than for regular stocks, which can complicate estate planning. The ETF route really does eliminate most of these landmines while still giving you energy infrastructure exposure.

This summary really captures the key decision points perfectly! Your phased approach of starting with AMLP while researching direct ownership makes a lot of sense. One additional consideration that might help with your future decision - if you do eventually move to direct MLP ownership, consider timing it with a major life change (like retirement) when you might have more time to manage the administrative complexity and potentially be in a lower tax bracket where the state filing burden is less painful. Also, some brokerages are starting to offer better cost basis tracking for MLPs, so the landscape may improve over time. But for now, your conservative approach of getting sector exposure through the ETF while learning more about the direct ownership complexities seems like the smart play. The fact that this thread has helped clarify these issues shows how much the investment community needs better education about MLP tax implications. Most retail investors have no idea what they're getting into with direct MLP ownership until they get their first K-1!

This is exactly the kind of professional insight that helps put everything in perspective! Your point about increased IRS scrutiny on MLP basis calculations is particularly concerning - having to provide documentation going back 5+ years really emphasizes why meticulous record-keeping is so crucial. The $25K threshold you mention for when direct ownership might make sense aligns well with the other position sizing guidance shared throughout this thread. It seems like there's a pretty clear consensus that smaller positions just don't justify the administrative complexity. I'm curious about your experience with clients who've received those IRS notices - were they generally able to provide adequate documentation, or did poor record-keeping lead to penalties? This kind of audit risk seems like another hidden cost that's hard to quantify upfront but could be significant. Your mention of MLPX is helpful too - I hadn't seen that fund mentioned before. Having multiple ETF options gives investors more flexibility to find the structure and fee arrangement that works best for their situation. As someone new to this community, I really appreciate how this discussion has evolved from the original state tax questions into a comprehensive analysis of the MLP investment decision framework. The collective wisdom shared here is far more valuable than anything I've found in traditional investment resources!

Logan, thank you for sharing those real-world experiences - they're exactly the kind of cautionary tales that help newcomers understand the actual risks involved! Your Colorado example is particularly sobering - turning a $23 tax obligation into a much larger penalty situation really drives home why even small allocations can't be ignored. Your point about coordinating UBTI across multiple IRAs is crucial and something I hadn't fully grasped from the earlier discussion. The fact that custodians don't communicate with each other about UBTI thresholds creates a coordination burden that many investors probably aren't aware of until it's too late. The geographic focus strategy you've developed (Texas, Wyoming, Florida) makes a lot of practical sense. Having looked at EPD's recent K-1 supplements, they do seem to have a more manageable state footprint compared to some other MLPs I've researched. This kind of strategic selection based on operational geography seems like it could significantly reduce the administrative complexity. Your experience really reinforces the consensus that's emerged in this thread about starting with ETFs for sector exposure. The penalties and coordination issues you've encountered highlight hidden risks that aren't obvious until you're dealing with them firsthand. One follow-up question - when you received that Colorado notice three years later, did they provide any guidance on how they identified the unfiled obligation? I'm curious whether state tax authorities are getting better at cross-referencing K-1 data to identify non-filers, which could make the "it's too small to matter" approach increasingly risky.

@6224d287976e Logan, your real-world experiences really highlight the hidden pitfalls that make MLP investing so tricky! The Colorado situation is especially eye-opening - I had no idea states could come after such small amounts years later with penalties that exceed the original tax. Your UBTI coordination issue across multiple IRAs is something I definitely need to keep in mind. It seems like the burden is entirely on the investor to track total UBTI across all accounts, which could easily trip up someone who's not extremely organized. I'm curious about your geographic focus strategy - when you're researching MLPs like EPD and ET, do you look at their prior year K-1 supplements to understand their state footprint before investing? And have you noticed whether their geographic concentration has remained stable over time, or do these partnerships tend to expand into new states as they grow? Also, regarding that Colorado notice - did they explain how they identified your unfiled obligation? I'm wondering if states are getting more sophisticated about cross-referencing partnership data to catch non-filers, which would make ignoring small allocations increasingly risky. Your advice about starting with ETFs and only moving to direct ownership with larger positions really resonates after hearing about all these potential complications. The administrative burden seems to scale non-linearly with the complexity!

@6224d287976e Your Colorado experience is a perfect example of why the "it's too small to matter" mindset can be dangerous with MLPs! I'm curious - did Colorado's notice provide any insight into how they identified your unfiled K-1 allocation? I've been wondering whether states are getting more sophisticated about cross-referencing partnership filings with individual returns. Your UBTI coordination issue across multiple custodians is particularly concerning. It seems like a trap that could easily catch investors who assume their brokerages are handling everything properly. Do you know if there are any services or tools that help track UBTI across multiple accounts, or is it purely a manual coordination effort? The geographic focus strategy you've developed makes a lot of sense. When researching EPD and ET's state footprints, do you review their historical K-1 supplements to see how stable their geographic concentration has been over time? I'm wondering if partnerships tend to expand into new states as they grow, which could gradually increase the filing complexity even for carefully selected MLPs. Your hard-learned lessons really reinforce why starting with ETF exposure makes sense for most investors. The penalties and coordination burdens you've encountered highlight risks that aren't obvious until you're dealing with them firsthand!