“Now boarding, flight 4890 to Baltimore”
The gate agent was announcing my Sunday flight back to Baltimore. But I wasn’t listening.
Instead, I was furiously scribbling calculations on a notepad. Had I really just found a way to cut taxes by 75.7 percent?
I double checked all my figures. Then I used the super-slow airport wifi to make sure my sources were correct. And then…
Everything added up. The tax loophole was completely legit. It had the potential to save hundreds of thousands in tax payments. And so far, no one had even noticed!
“Flight 4890, This is your final boarding call”
Oh crap! I was about to miss my flight!
I shoved my notes into my carry-on and sprinted over to the gate. Just in time, I boarded the flight, armed with a new opportunity to save you thousands of dollars.
Here’s a quick snapshot yesterday’s notes from Hartsfield-Jackson Atlanta International Airport:
Don’t worry, I’ll translate my poor handwriting for you. But first, let me explain how I stumbled across this surprising loophole.
A Surprising Twist to Trump’s Tax Proposal
For the last week or so, there has been a lot of buzz around President Trump’s tax proposal. The new tax plan should help boost business profits by lowering corporate tax from a current rate of 35 percent to just 15 percent.
That shift has the potential to boost investor returns as stock prices rise and dividend payments increase. In short, the more money corporations save on taxes, the more cash is left for investors like you and me.
In addition to the lower tax rate, there are a couple other provisions that will benefit taxpayers.
One final provision is that the personal tax rate for pass through businesses will be set at just 15%. And here’s where the loophole comes into play.
I’m actually a bit embarrassed that I missed this earlier. Last week when I saw the “pass through” provision, I assumed this was just for individuals who owned their own businesses (such as a personal LLC or sole proprietor business).
But as I sat in the terminal waiting for my flight, I realized that there is a huge class of exceptional investment opportunities that fall under this “pass through” business category. And by investing in these businesses, taxpayers will be able to cut out 75.7 percent of the taxes that would normally be paid to Uncle Sam.
Here’s How it Works…
The “pass through” clause in Trump’s tax proposal includes companies organized as Master Limited Partnerships (or MLPs). MLPs are a special class of businesses that are focused on energy infrastructure. In short, these companies generate profit through the production, transportation or refining of energy sources such as oil and natural gas.
To encourage investment in the country’s energy infrastructure, the tax code gives these corporations a special advantage. Companies organized as MLPs are not required to pay corporate taxes. But as a concession, they must distribute the vast majority of operating earnings to investors.
This makes MLP’s a great investment already. I’ve recommended these stocks to my Lifetime Income Report subscribers for many years. Owning MLPs is a great way to generate reliable income from your investment portfolio.
But Trump’s new tax proposal makes this situation even better! That’s because as “pass through” companies, you’ll now only have to pay 15% personal tax on the income you receive from these investments. Ultimately, this means the IRS will be receiving 75.6% less in taxes from these companies.
Here’s how the current tax code works:
Today, if a corporation turns a $100 profit, it is taxed at 35%
This leaves $65 for investors who pay a 39.6% tax rate
After personal taxes, investors have $39.26 left. The government gets $61.74
It’s a little sobering to realize that the government gets a full 61.74% of every dollar that a corporation earns (after accounting for individual taxes). And that doesn’t even count state taxes that you might be required to pay.
Under the new proposed tax code, things are slightly better for normal investments:
If a corporation turns a $100 profit it will be taxed at 15%
This leaves $85 for investors who pay a 35% tax rate
After personal taxes, investors have $55.25 left. The government gets $44.75
So even with the new tax structure, the government is still getting 44.75% of every dollar a corporation earns. That’s way too much in my opinion. It’s very frustrating to see the effect that our double taxation structure has on our investments.
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But our MLP investments are definitely in a sweet spot:
If a MLP turns a $100 profit, it pays no corporate tax
This leaves $100 for individual investors who pay a 15% pass through tax rate
After personal taxes, investors have $85 left. The government only gets $15
As you can see, this structure gives us a definite advantage when investing in MLP opportunities. In fact, it saves you 75.7% on total taxes paid to Uncle Sam!
Of course, this tax proposal must be debated by Congress and there will likely be some changes before it is passed into law. But even without the special “pass through” allowance, MLPs are great investments. That’s because these corporations are able to avoid corporate taxes and are only taxed on the personal level.
Also, I love the fact that MLPs are required to payout the majority of their earnings each and every year.
So under today’s tax structure, MLPs are very good investments.
And under Trump’s proposed tax plan, these MLPs become GREAT investment opportunities.
Here is a list of some world famous MLP companies to consider adding to your portfolio.
Enterprise Products Partners (NYSE:EPD)
Perhaps the largest of all pipeline plays, Enterprise Products Partners boasts a $57.9 billion market cap with a 6.08% dividend. For a company worth tens of billions, this is one of the most lucrative dividends you can find. Enterprise has pipelines running across the country, but the majority of their operations take place in southern Texas and Louisiana.
Sunoco Logistics Partners (NYSE: SXL)
SXL is an all-inclusive midstream play that has one of the highest dividends in the market at 8.57%. They are a bit smaller than Enterprise Products, with a $7.94 billion market cap, but they make up for that size with their hefty dividend. The majority of Sunoco’s pipelines run from New York, to the Midwest, down to Texas.
Magellan Midstream Partners (NYSE: MMP)
This midstream play is a cut above the rest because of their strategic placement of pipelines and terminals. Magellan is primarily focused on refined products, which means their goods are ready for consumption. What makes them valuable is that their pipelines have access to 50% of US refineries, spanning over 9,500 miles. Besides their dominant share of the refined products market, they pay a 4.61% dividend.
I’ll be keeping a close eye on the tax package as it moves through Congress. There will certainly be plenty of opportunities to exploit as new details emerge, so stay tuned!
Here’s to growing and protecting your wealth!
This article was originally posted on Daily Reckoning.