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Marcellus/Utica Shale News
Dear Marcellus/Utica Shale Owner:
As the Senior Trust Officer of 1st National Community Bank, I want to make available to you access to the resources that we have developed to provide financial guidance to our Marcellus/Utica Shale land owners.
This will possibly be the most exciting financial development in this region for years to come. Sudden wealth from natural gas royalties may have you wondering what challenges and opportunities are hiding, just around the corner. For the first time you may be experiencing:
- The need for income tax planning
- The ability to pay down debt
- The accumulation of an Estate larger than the exclusion amount
- The need to use an attorney
- The need for a financial advisor
- Things you might not even know about today
The comprehensive approach at 1st Bank is designed to keep you ahead of the curve, avoid obstacles, and get you where you want to go with absolute confidence. On the website we've provided two links for your review an "Estate Planning Test" and "Checklist for Estate Planning" as well as a couple of brochures about our Trust Services. These are designed to get you thinking about your planning.
Every family situation is different. One size plan does NOT fit all. We at 1st Bank would like to schedule a face to face meeting. The purpose of that meeting would be to do a financial assessment interview to determine if you need help with an Estate Plan. This is a no cost and no obligation meeting. We are the trusted advisors of many and we would like to make ourselves known to you.
Please call me or email me soon to schedule a meeting,
Jeffrey W. Bail, CPA
VP & Sr. Trust Officer
1st National Community Bank
***The following information is related to the taxation of the income received related to your shale leases. We hope you find it helpful!
Potential Tax Implications of Gas Lease Income
The extraction of natural gas from Marcellus Shale deposits in Ohio and Pennsylvania is bringing substantial financial benefits to many landowners. Significant tax implications often accompany these benefits so landowners planning to enter into a gas lease need to be aware of how income from a gas lease is taxed and how it can affect the landowners overall tax profile.
Lease Bonus and Royalty Payments - These amounts are taxed as ordinary income, subject to marginal federal tax rates up to 35 percent (potentially 39.6 percent in 2011).
Depletion Deduction - A tax incentive, in the form of a percentage depletion deduction, is available to most recipients of royalty payments (not lease bonus payments). The percentage depletion deduction is equal to 15 percent of royalties received, resulting in only 85 percent of the royalty usually being included in a taxpayers income.
Changes to Overall Tax Profile - Increases in income can have hidden tax costs. Additional income may result in a greater portion of Social Security benefits being included in federal taxable income or a phase out of various tax deductions and credits.
Reducing the Impact of Lease Income - Concentrating deductions in tax years in which significant lease bonus or royalty payments are received can help reduce income. Deductions to consider include maximizing depreciation and Section 179 equipment expensing deductions for a landowner's farm or self employed business; maximizing allowable contributions to IRAs and other retirement plans, establishing Health Savings Accounts, if applicable; bunching of several years' charitable donations for landowners who itemize deductions; and other techniques that can be suggested by your tax advisor.
Damage Payments - Payments negotiated as damage payments can receive favorable tax treatment. Damage payments related to land or timber are tax free to the extent of a landowners basis (generally his or her cost) in the affected property. Payments in excess of the basis are usually taxed as long term capital gains. (Payments for damages to a farmer's crops are considered ordinary income from the farm.)
These ideas are not intended or written to be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations and cannot be used for these purposes.