Tax time is a day of reckoning for investors, when Uncle Sam demands his slice of interest, dividends and capital gains. In most cases the calculations are straightforward. But some types of assets throw curve balls – tax bills that defy logic.
In some cases, offbeat tax issues are the price for wandering off the beaten track of stocks, bonds and mainstream funds. Other cases seem like a slap in the face, like an unexpected bill for a plain vanilla holding like a U.S savings bond.
But the rules are the rules, so investors should study up when choosing a new type of holding, avoid waiting to the last minute to prepare the tax return, and have enough cash available for a surprise tax bill.
Here are a few tax surprises that could trip you up:
MLPs in IRAs. “Most folks think that anything that happens inside of IRAs isn’t taxable. While that’s mostly true, certain investments throw off a type of income that does end up causing tax headaches,” says Ben Birken, a planner at Woodward Financial Advisors in Chapel Hill, North Carolina. “This is called unrelated business taxable income (UBTI), and it’s most often associated with income from master limited partnerships.”