December 1, 2014

Certainly, experiencing a financial windfall can be a positive experience, especially during the holiday season. The downside of earning royalties or bonus money, however, is that you may not be clear about how these items are taxed. Advance planning can help you prepare for a sudden influx of money, whether you’re a musician or a property owner leasing your land for oil drilling. 

For the most part, income like royalties from oil drilling rights or bonus payments are treated as taxable income by the US government. It’s important to realize how this money will be taxed, but also how it will influence your tax bracket. Since many people are not aware of the tax consequences of this money, they tend to make a common mistake in using that money to purchase new assets or to pay down debts. If you end up spending the majority of the windfall, you won’t have said enough aside for the taxes. Make sure you calculate taxes in first before spending the money.

There are numerous options to help you plan for a sudden windfall of money. Depending on the amount of money, you may even be considering legacy planning using limited partnerships, trusts, or family limited partnerships. If you have recently become involved in a royalty or bonus situation, you should consult with an experienced estate and tax planning attorney to talk about the short-term and long-term consequences.

To start with, your property values prior to royalties may not surpass estate planning limits when it comes to estate taxes. Over time, however, the value of the lease or the rights in oil drilling, for example, may expand past the estate planning exemption. If you own property in another state, it’s important to consult with an estate planning and tax planning specialist if this property will ultimately be used for oil drilling or similar pursuits. To learn more about royalties and their impact in terms of taxes, reach out to us at info@lawesq.net.