The information provided on this page is for general informational purposes only and does not constitute legal, financial, or investment advice. Oil and gas laws, mineral rights regulations, and royalty structures vary significantly by state and jurisdiction. While we strive to provide accurate and up-to-date information, no guarantee is made to that effect, and laws may have changed since publication.
You should consult with a licensed attorney specializing in oil and gas law in your jurisdiction, a qualified financial advisor, or other appropriate professionals before making any decisions based on this material. Neither the author nor the publisher assumes any liability for actions taken in reliance upon the information contained herein.
What Income Taxes on Oil and Gas Royalties are Paid
A wise man once said that there are two absolute certainties in life: death and taxes. Yes, unfortunately, if your mineral rights are earning you a nice oil and gas royalty paycheck every month, those earnings are subject to taxation. In this article, we will outline the taxes on oil and gas royalties that are or are going to be deducted from your paycheck.
Federal Income Tax on Oil and Gas Royalties
Any money that is headed into your bank account is going to be considered income. Oil and gas royalties are no exception. Therefore the standard federal income tax on oil and gas royalties will be deducted when you go to file your taxes. Depending on your income bracket, this could be anywhere between 10 and 37 percent of your income.
State Income Tax on Oil and Gas Royalties
In the United States, tax laws between individual states have a large range of policies. Certain states, like Texas, Wyoming, and Nevada do not have a state income tax deduction. Most states, however, will claim a small percentage of your income with a state income tax. The amount allocated is either a flat rate, like in Colorado and Pennsylvania amongst others, or a percentage of your income based on your total earned each year.
Oil and Gas Royalty Bonus Income Tax Rates
Although the monthly income from your oil and gas royalties are considered as normal income, bonuses received during the sale and signing process are classified as a separate kind of earnings. Although they are taxed at roughly the same rate, if you receive a bonus signing rate of anything above $600, you will have to file that income separately from your monthly oil and gas royalty income.
Tax Deductions for Mineral Rights Income
When it comes time to do your taxes on oil and gas royalties, you’ll want to make sure you add up all of your deductions as they relate to your oil and gas royalty income. Depending on your involvement with the extraction process, you may be eligible for deductions on marketing, state income, severance, depletion allowance, legal, professional, or shipping expenses. Consulting a tax professional will be the best way to explore and deduct the highest available amount from your annual taxes on oil and gas royalties.
