Royalty 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.
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
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.
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