As the year is quickly coming to a close, be sure you consider potential avenues for tax planning for your oil, gas, and mineral interests.
Lease Offers & Bonus Funds
Bonus funds are taxed as ordinary income. If you have a lease offer in hand, consider asking the agent to (a) pay all funds in 2014, (b) pay all funds in 2015, or (c) split the funds between 2014 and 2015 in a certain proportion. Considerations on splitting income might relate to other anticipated income on your respective years (e.g. any lottery winnings this year), any anticipated legal fees or deductions (e.g. do you need to do a probate), or other life circumstances (e.g. close to retirement and likely to have an income decline). Your accountant can likely assist with projections or advisements on what may make the most sense for your situation. If some planning makes sense to you, insist on timing of payments as part of your agreement to sign a lease offer.
Royalty Income
Royalty income is also subject to income taxes, and in some instances, the new (as of 2013) net investment income tax (NIIT). If you recently received a division order or are considering estate planning that might result in transfer or changes in ownership to your oil, gas, and mineral interest, then you might taking a closer look at your income and tax situation as part of that review or planning. As with bonus money, you may want to consciously consider what impact your decisions have on your tax situation and potentially plan for segregations or divisions of funds between 2014 and 2015. Changes in ownerships or release of royalties from suspense in some instances may be undertaken at specific times or intervals with tax planning objectives in mind.
While standard income taxes are likely to affect royalty owners more directly, for those owners that have substantial royalty income, then the NIIT should also be considered, especially for those having royalty income in excess of $200,000.00. Additionally, if you have royalty income as well as other “interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer,” then you should pay particular attention to NIIT if you are generally above the $200,000.00 mark on those categories.
Jenna H. Keller, Esq.
Attorney at Keller Law, LLC. (www.kellerlawllc.com)
Jenna H. Keller provides legal services to farmers, ranchers, rural property owners, and severed mineral interest owners in the areas of estate planning, natural resources (oil, gas, wind), real estate, and water in Nebraska and Colorado.
The information is for general information purposes only. This should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment).