Expert: Frederick M. Scott - 4/7/2009
I receive royalty payments from my late husband's estate, but am confused as to how much of the royalties are taxable as income. it was once explained to me that only part of them are taxable; the remainder considered principle. I live in a state far removed from oil producing states, and local accountants seem "clueless" on this subject.
Kay, royalties on the federal level are taxed as regular income; however, there is (for now anyway) a "depletion allowance" that can be deducted from the "gross" royalties. The percentage depletion allowance has been in the federal tax code since the 1920's, and the percentage has changed over the years. Not sure what the current amount is, but it's a fairly small percentage. Check with an accountant.
Even one in a "state far removed" from oil and gas production should be able to look this up fairly easily.
President Obama's budget is calling for the repeal of the percentage depletion, which, if repealed, would hurt both royalty owners and independent producers.
One site I came across that explains the depletion allowance can be found at: http://www.groco.com/readingroom/oil_gasdepletion.aspx I do not endorse this site particularly, but in my quick search for "depletion allowance" did come across it. It appears informative on the subject.
If you are SELLING minerals, the proceeds are taxed at the long-term capital gains rate of only 15%, rather than as regular income; assuming you've owned them for more than a year. Some people prefer to sell their producing (and non producing) minerals for this reason.
Frederick Scott CMM