Understanding Royalty Taxes – Part 5 Income!
June 18, 2019
Selling royalties can be a lucrative endeavor for many people who own mineral interests.
Like any other type of earned income, the income you generate selling royalties is also subject to taxation at the federal and state level.
Income Taxes for Mineral Royalties
Anyone who owns producing mineral interests and has earned income either through royalties or the sale of their interests is required to pay federal taxes on that income as well as state taxes where that is required.
You must pay income taxes on earnings generated through oil and gas production when required:
===>> You earn income selling royalties, as that income counts just like any other income you might earn in other ways.
===>> You receive a lease or signing bonus, as bonus payments are also taxable income and classified as rental income.
If you do sell your mineral rights outright, you do not have to pay income tax on your earnings as this is considered property; instead, you are required to pay a capital gains tax as discussed in Part 3 of this series.
Federal Income Tax Rates When Selling Royalties
Income generated from royalties for sale, including any rental income obtained from lease and signing bonuses, is taxable at the standard income tax rate based on your overall yearly taxable income.
Fortunately, there are a number of claimable deductions that you can take to reduce your taxable income including severance tax deductions, processing fees, marketing fees, depletion allowance discussed in Part 2 of this series, and others.
Filing Your Income Taxes for Earned Royalties
To file your yearly taxes on income earned by selling royalties, you will need to submit a 1099 form that you should receive from the energy company or entity producing from your interest that has been sending your monthly production statements.
You should also receive a separate 1099 form for any bonus income you receive.
Though these forms usually start mailing out in February, it’s advisable to keep your own records as well as all payment statements and related documentation so you have documentation of the earnings received from your royalties for sale throughout the tax year.
Talk to A Royalties Professional
Filing taxes on income generated from selling royalties can be confusing, especially if you qualify for any of the tax credits or incentives available to those with royalties for sale or are filing your royalties income as business income.
Handle your royalties-related taxes correctly by keeping detailed records of all yearly transactions, then work with industry professionals who can assist you determine your amount of responsibility.
Don't miss the 6th and final part of this series on Ad Valorem taxes Understanding Royalty Taxes - Part 6 County Ad Valorem for info on one more tax to know about - and if you missed Part 1 Oil Severance, Part 2 Depletion Allowance, Part 3 1031 Exchange, or Part 4 Gas Severance, here are the links for them as well!
Tax Questions About Selling Royalties In Texas?
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