Handling Royalty Trusts In TurboTax

Handling Royalty Trusts In TurboTaxRoyalty trusts are a great way to add income to your portfolio. The fact that you can reduce the taxable portion of your ‘royalties’ by factoring in administrative expenses and depletion is an added bonus.

The downside is you have to calculate those expenses yourself based on the Tax preparation booklet Royalty trusts will send you during tax time. And based on those figures you’ll have to fill out a Schedule E (Form 1040).

If you own Royalty Trusts in a tax-deferred account, you can skip the tax preparation step and unlike MLPs, owning Royalty Trusts in your 401K or IRAs won’t trigger the dreaded UBTI. But if you happen to own them in a taxable account, be prepared to spend some time doing the tax math for each Royalty Trust you own.

Owning a Royalty Trust in a Taxable Account – What to Expect

If you own a Royalty Trust in a taxable account, come tax time, expect these in the mail:

  • 1099-MISC Miscellaneous Income form
  • Tax preparation booklet

You’ll get these even if you haven’t sold your units. 1099-Misc details the royalties you received for the tax year. The tax preparation booklet is required to calculate the net gain or loss on your distributions. You’ll get to reduce your tax liability on your royalties by reducing administrative expenses and depletion charges. Since the Royalty Trust doesn’t keep track of how many units each unit holder holds, you’ll have to do the calculations yourself.

Once you have the numbers, you should know where to enter them in TurboTax. And no, upgrading to TurboTax Premium is not going to make the task any easier! I hope the slideshow below will ease some of your pains! I’ve used BPT as an example, but the process is quite similar for other Royalty Trusts as well.

Handling Royalty Trusts In TurboTax

Handling Royalty Trusts In TurboTax

Prepared using TurboTax Deluxe

In TurboTax, go to Federal Taxes.. Wages and Income and select Rentals and Royalties.

Handling royalty trusts in turbo tax

1

You are not a Real Estate Professional

2

Property Information

3

Type of Property

4

Property Ownership

5

Making payments requiring a 1099?
6

Tell us about the property assets

7

Any depreciation deductions?

8

Do you have vehicle mileage or expenses for you rental property?

9

Any rental income?

10

Fill in any amounts that appear in your 1099-MISC form that you received from your Royalty Trust

11

Enter income received

12

Enter any royalty expenses you had

13

Report mortgage interest

14

Any other interest paid

15

Any other situations?

16

Your profit or loss so far

As you can see, the process isn’t straightforward and can easily confuse someone entering RT data in TurboTax for the first time.

Royalty Trust FAQ

I never received the Tax Preparation booklet, what do I do?
If you did not receive the Tax Preparation booklet from your Royalty Trust, you can contact them to send you one or you could download the pdf from the Royalty Trust’s website. The tax preparation booklet will not contain any personal information (like your SSN).

Also remember, the booklet is sent to you by the Royalty Trust, not your broker.

I own Royalty Trusts in my IRA do I have to fill out Schedule E?
For tax-advantaged accounts, you don’t have to fill out Schedule E. The extra tax work is required only if you own them in a taxable account.

Are there online tools to do the Tax Preparation for Royalty Trusts?
All you need is a calculator! But some Royalty Trusts do provide online tools. All you have to do is fill out the number of units you held during the tax year and it’ll do the work for you. Check the Royalty Trust’s website.

Where can I learn more about Royalty Trusts?
Check out my previous article: Unconventional Income From Uncommon Stocks – Royalty Trusts

Recommended Reads:
How to handle MLP Schedule K-1s in TurboTax

Disclaimer: Not a recommendation to buy BPT. I’m not a tax consultant and the information presented is not intended as legal or tax advice. Consult a qualified tax tax professional before filing your tax return.

photo

Tagged with  
, ,

14 thoughts on “Handling Royalty Trusts In TurboTax

  1. Nice clear presentation that will save a lot of people a lot of time!

  2. MC, this is nice. I don’t have royalty trust, but after reading your article, I certainly wanted to digg out more info on it. BTW, I love to read any tips on saving taxes. :)

  3. Karunesh @ chase-a-dream.com says:

    Thanks for sharing Money Cone :)
    would earnings from a Blog be counted as royalties ?

  4. These forms are a pain. AFter working through a few over the years, I learned my lesson…. keep these types of investments in a tax deferred account!

  5. We don’t have a royalty trust either but it is definitely an option to look more into. Thanks for such a detailed post. Very helpful.

  6. Great info, but that is why I keep it in my IRA!

  7. Very detailed post. Will definitely include in my Weekend Reading roundup.

    So far, this one takes first prize for the most informative post :)

  8. No royalty trust for us. But, good to know the concept.

  9. Boy taxes sure are a pain in the rear. I’m so glad I have mine done for last year and first quarter. I sure did a lot of cursing when I saw how much I paid in taxes!

  10. Great post MC!!!! We don’t have royalty trusts; however, this is another way to diversify income streams, which is always a consideration. This definitely sounds cumbersome tax-wise. Thanks for sharing!

  11. Good article, MC – I have a few trusts and MLPs, but only in my 401k. I get the booklets at tax time, but can ignore them for now. Great slide show!

  12. I’ve never heard of a royalty trust – but it sounds like a good idea, and not too tough to handle come tax time!

  13. Great information — definitely something to check out!

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title="" rel=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>