If you’ve been wondering about the tax rates on oil royalties, your answer may not be as clear cut as you thought. After federal taxes based in income and capital gains, there are state and county laws that greatly differ. Generally speaking, you can calculate your tax rate based on these numbers:
- From the standpoint of federal income taxes oil royalties are taxed as ordinary income with a taxable rate of as high as 39.6% plus a 3.8% Obamacare add on for income after 200,000. (250,000 for couples filing jointly)
- If you sell your royalties and have owned them for more than a year, the net proceeds are taxed as long-term capital gains which are currently at 20%.
- If you live in a state which has a state income you must also pay the applicable percentage in state income tax which can be as high as 10% depending on the state you reside in.
- Many states also charge a severance tax and can be as high as 12.5% of fair market value depending on which state the property is located.
- In many states, the county where the property is located charges you with ad valorem or property tax. This averages about 5% of fair market value, again dependent on the county and state that the property is located.
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