Taxes / Uncle Sam Gets How Much?!

Accounting and Taxes
1

In regards to bonus checks for leased mineral rights in Texas -

I was told by a CPA that in Texas, there are no tax shelters for this type of income and that I should expect to pay approximately 44% in taxes.

For any royalty income, I was told that I can significantly reduce my tax burden through a LLC. I can only do this with the royalties though, not the bonus received (per acre) for the lease.

Again, this was from a CPA.

I am curious as to any other experiences or advice in regards to this.

2

Texas has no income tax, so it is irrelevant as to the location of the CPA. What is relevant is the location of the production and the state taxes that go with it.

Now, the bonus is a Federal Tax line item on your return. AS to the significant reduction in tax burden by having a LLC, ask him to explain how this is so. Right now, there is a depletion allowance on the Federal return for royalty income. Ask him how a LLC can improve on that situation.

Buddy Cotten

3

What you're saying does sound off. The lease bonus is ordinary income for federal tax purposes and many people split the payment over two years if the bonus amount is significant. Texas does not have a state income tax. I believe that the top marginal federal tax rate is 39.6% for [and don't quote me on this as I pay a CPA because I am not one] $450,000 or more. Of course that would not be your effective tax rate because parts of your income would be taxed at a lower rate in lower tiers. I would definitely consult a different CPA.

4

Did you ask to split the bonus payment over two years, half this year and the other half in January next? That should bring you down a few brackets.

5

Bonuses are taxed as ordinary income. Perhaps he reached the 44% number by adding your state income tax to 39.6%? I don't know where that number came from.

6

A LLC is a pass-through entity on taxes. The IRS will class it as a Sole Proprietorship (or Partnership if others own part of it) Look at a Federal form SS-4. Any deduction available as a individual is there as a LLC. The LLC does not prevent any deductions an individual would have.

It sounds like the first thing you need to do is FIRE the CPA.

The only way it makes sense to split the bonus payment across two years, is if the bracket changes for a large portion of it, or you expect far less taxable income next year.

Some people think that when they move to a higher tax bracket the rate changes for all of the income. That is not correct. The rate only changes for the amount that exceeds the cap of the previous bracket.

Federal Married filing jointly tax rates:

10% on taxable income from $0 to $17,850, plus
15% on taxable income over $17,850 to $72,500, plus
25% on taxable income over $72,500 to $146,400, plus
28% on taxable income over $146,400 to $223,050, plus
33% on taxable income over $223,050 to $398,350, plus
35% on taxable income over $398,350 to $450,000, plus
39.6% on taxable income over $450,000.

Say you are going to get a $50K bonus and you are in the 25% bracket rate making $126,500 (without the bonus) . On the bonus you'll pay 25% on the first $20K and 28% on the remaining $30K. 5K+8.4K or $13,400 in taxes.

If you split it into two payments of $25K
you'll pay 25% on the first $20K and 28% on the remaining $5K each year. 5K+1.4 K or $6,400 each year.

All of that work and you pay $12,800 instead of $13,400. You save $600 "IF" tax rates do not increase.

And I don't want to trust them to pay me the other 1/2 next year. I'd just as soon have it up front.

7

I think 250k would be enough to me to make it worthwhile to split the bonus between years. The example of $50k does support what was said because it doesn't move you as many brackets and the total bonus is still fairly low.

There are always people who will take the cash option if they won the lottery even if it means paying millions extra in taxes. There is always another way to skin a cat. You could probably get a loan for what you need at an interest rate lower than the tax rate.

If you are mistrustful of the lessee as I certainly would be, you could simply lease half this year and half on January first. The lease of January first next year could be effective to the same time of the first lease, the lessee simply does not get his hands on it if he does not pay.

8

Okay... help me out... I live in Texas and have been approached to sell mineral rights on land in Arkansas that I inherited... Will this all be taxable since it was inherited?

9

Depends on how much it is worth.

norma smith said:

Okay... help me out... I live in Texas and have been approached to sell mineral rights on land in Arkansas that I inherited... Will this all be taxable since it was inherited?

10

Since i am retired my social security and retirement is around 60,000 and the offer to buy the rights is 54,000.

11

39.5% on the amount over $450,000.

Let’s say your normal income is $250,000. And you get a $250,000 bonus check on a lease. So the total income for the year is $500,000, you are only paying 39.5% on $50,000 of it. 35% on $51,650, 33% on the last $148,350 of the check. Total taxes on the bonus would be $86,783 or 34.7%


Brian said:

To recap for anyone searching this forum on this topic:
If you are fortunate enough to lease your mineral rights and receive a bonus check that puts you over the $450,000 income level, Uncle Same is going to take 40% + of it.

12

Yes,

It is taxable. It is subject to capital gains taxes of 15% above your basis in it. (as long as you have owned it a year or longer) If it was probated, a value was set in the probate which will be the basis. It if was gifted before death, the basis they had in it was also gifted. You pay 15% on the amount you sell it for minus the cost (basis). Your basis may be $0 or near $0 if it is non-producing.

norma smith said:

Okay... help me out... I live in Texas and have been approached to sell mineral rights on land in Arkansas that I inherited... Will this all be taxable since it was inherited?

13

Rick, it was never probated and wasn't gifted before death... Mother died in 03, and it became ours then, so what your are saying is that a basis was never established?... It is not producing, so we would pay 15% capital gains tax on the selling price?... Would it, also, be considered as income and income tax due in addition to capital gains???

14

You'll spend more trying to establish a fair marketable basis than it will cost you to claim $0. Say that it would be $200 per acre basis and you had 10 acres. The additional tax on the basis difference will be $300. You'll pay much more to document that. The capital gains is instead of income ordinary income tax, not in addition to the normal tax. It works the same as stock or real estate transaction (that are not primary residence).

Producing or not on the basis, would be at the time of the transfer in 03 however. If it was producing then, it might be worth pursuing.

Even the 15% rate changes with income.

https://www.fidelity.com/viewpoints/personal-finance/taxpayers-guide

Talk with a CPA or a really good tax professional that is familiar with Oil and Gas properties.

I am neither.

15

Thank you so much!! You have been a big help!! I didn't see how the selling of rights could be considered as ordinary income as I was being told... This is all making a little more sense... Would have been so much easier if we had done a probate, but didn't think it was necessary at the time because everything else had been gifted... never thought about mineral rights...

16

As to splitting the bonus into two (or more) years, forget about it. You can if you want to, but that doesn't mean the IRS agrees with what you're doing for tax purposes. Revenue Ruling 68-606 has been out there a long time and many a taxpayer has been surprised by it. Whether you receive in one year or two, it's still all taxable in the first year you were able to receive it, regardless of when you actually received the cash. I've seen way too many schemes and gimmicks attempting to get around it. They just don't work. Many tax court cases on this one. As to the LLC, I'm at a loss to understand how that will help. It's simply a pass-through entity. The tax results will be the same.

17

I was instructed by my CPA to put back 48% of royalty payments to cover the IRS bill as well as Ad Valorem taxes.

18

Nice explanation of the tax break down. You confirmed my idea.

Do you have any ideas about how I could find information about handling IRS - FACTA? (Am expats have to file this for 2014.)

Rick Howell said:

A LLC is a pass-through entity on taxes. The IRS will class it as a Sole Proprietorship (or Partnership if others own part of it) Look at a Federal form SS-4. Any deduction available as a individual is there as a LLC. The LLC does not prevent any deductions an individual would have.

It sounds like the first thing you need to do is FIRE the CPA.

The only way it makes sense to split the bonus payment across two years, is if the bracket changes for a large portion of it, or you expect far less taxable income next year.

Some people think that when they move to a higher tax bracket the rate changes for all of the income. That is not correct. The rate only changes for the amount that exceeds the cap of the previous bracket.

Federal Married filing jointly tax rates:

10% on taxable income from $0 to $17,850, plus
15% on taxable income over $17,850 to $72,500, plus
25% on taxable income over $72,500 to $146,400, plus
28% on taxable income over $146,400 to $223,050, plus
33% on taxable income over $223,050 to $398,350, plus
35% on taxable income over $398,350 to $450,000, plus
39.6% on taxable income over $450,000.

Say you are going to get a $50K bonus and you are in the 25% bracket rate making $126,500 (without the bonus) . On the bonus you'll pay 25% on the first $20K and 28% on the remaining $30K. 5K+8.4K or $13,400 in taxes.

If you split it into two payments of $25K
you'll pay 25% on the first $20K and 28% on the remaining $5K each year. 5K+1.4 K or $6,400 each year.

All of that work and you pay $12,800 instead of $13,400. You save $600 "IF" tax rates do not increase.

And I don't want to trust them to pay me the other 1/2 next year. I'd just as soon have it up front.

19

Don't forget the Obamacare surtax of 3.8%. This takes the highest marginal federal income tax rate to 43.4%