How to avoid paying taxs on your leases

Any suggestions on how to avoid paying taxs on your leases, before the 1 Jan rolls around.

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Permalink Reply by George Brown on December 30, 2011 at 3:23am

I agree with Matt that you have to pay them.  However, you can minimize the size of the wound if you can take advantage of certain tax breaks. The income from the lease with increase your overall adjusted gross income so you need to find deductions. For example, in my case, I can increase my contribution to my company's 401k plan.  I don't really want to do that because it takes cash out of my hands right now, but in the long run it helps. Also, since I'm over fifty, I can contribute additional money to the 401k called catch-up contributions.  I think the max is something like $22,000 per year. So, if I'm receiving say $50K in lease money or royalties, I could shelter $22K from taxes.  That might also help keep me in a lower bracket.  Most importantly, you need to do anything you can to stay out of the alternative minimum tax (AMT). That one can be a killer.

If you have a business like a farm, you can invest in new equipment up to a certain point.  Section 179 deduction allows you to write off up to $500,000.  Again, you'd be spending the money rather than keeping it, but if you have a business and need new equipment anyway, at least you'd be putting your money to good use.

If you're just a typical homeowner with a normal job, about all you can do easily is contribute to 401k or an IRA unless you want to look into more advanced options like trusts, partnerships, etc. For that, you better talk to a good tax accountant.

Permalink Reply by brian kulp on December 31, 2011 at 8:43am

i believe the total amount can be 25% of your gross income towrds retirement . that includes pensions and 401s.

Permalink Reply by JMS on January 8, 2012 at 3:34pm

That was a nice, tight little package of info there George!  I generally cut and paste these kinds of replies into my Marcellus info file...for future reference. Thanks very  much for what seems to be a great answer, and guidance for those of us with nothing but questions!

Permalink Reply by Jim Litwinowicz on December 29, 2011 at 8:54am

Max out your IRA/KEOH payments.  Buy farm equipment and improve your buildings if you are an active farmer. I just bought $2000 of Energy Star windows to get the tax write off. Sell any bad stock investments for the loss write off.

Not much else you can really do.

Permalink Reply by Kathleen on December 30, 2011 at 2:37am

One way is to turn around and buy more land with mineral rights or buy mineral rights.  There is a clause that states if you buy into the same thing you got the money from you do not pay taxes on that money until you sell that at a later date.  I always feel land is a win win over time so taking some of the lease money and buying more land in a play in an area you hope one day will grow you could win in ever direction.  Some areas of Ohio still have mineral rights included with the land 2-4 thousand an acre.

Permalink Reply by Gary Ball on December 30, 2011 at 5:19am

I wish I had more time to check into all these options, we received our check 2 weeks ago and not much time to plan anything out before the 1st of the year, before we received our check, really wasnt sure when it would arrive after signing lease

Permalink Reply by grayhairedgrandpa on December 30, 2011 at 12:03pm

Actually, you do have more time to contribute to a traditional IRA to reduce your taxable income. The deadline for 2011 IRA contributions is April 15, 2012. Don't forget if you are married and file a joint return, then your contribution is effectively doubled. If you are not a seasoned investor, simply make the IRA contribution to a low fee target-date retirement mutual fund from T. Rowe Price, Fidelity or Vanguard (as examples). If desired, you can always exchange into another fund later on.

Permalink Reply by Frank Walker on January 2, 2012 at 12:40pm

It's worth pointing out income from rents and royalties can be used neither to establish an IRA nor to contribute to an existing IRA.

It is true that such income might free up other income which is eligible to be contributed, but which might not otherwise be available.

But, speaking in general, only earned income is allowed by law to be used for IRA purposes.  And income from royalties, or rents, is not earned income.

Permalink Reply by Fred J Graft on January 3, 2012 at 5:39am

Kathlene - you are correct it is called a 1031 exchange and you postpone paying capital gains if done according to the tax law till your final property is sold.  Current capital gains tax is 15% so it is worth the effort.  You need a good accounting firm to properly advise you prior to receiving your bonus check.  Fred

Permalink Reply by JMS on January 8, 2012 at 3:37pm

I'm not leased yet, but another great idea Kathlen...thanks!  I am glad there are so many of you out there who know what you're doing...wish I had a clue!

Permalink Reply by craig on December 30, 2011 at 5:23am

Considering you will most likely be in a higher tax bracket for some time with royalty checks, it would be prudent to give some thought on when will it be best for you to pay those taxes. Now, when you know what it is going to cost you or later when you don't know what changes the gov't is going to make. I some cases it would be wise to pay the taxes now instead of deferring them to later.  

Just some thoughts I've had going forward.

Permalink Reply by George Brown on December 30, 2011 at 6:57am

No doubt about it, Craig.  Who knows what these clowns will do next.  When we start getting our royalty checks, we will be considered to be evil rich people so you can bet the Socialist-in-Chief will do whatever he can to get his greedy hands on your cash. And don't expect the Republicans to stop him. They have their own needs for cash and cronies too.

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