Ohio State Experts Offer Up Great Advice to Landowners
On a windy afternoon in St. Clairsville this past weekend, the Ohio State University Extension Office blew into town to discuss what landowners need to do with their new found wealth. As landowners are beginning to receive their leasing payments, they need to start thinking about the tax implications and possible financial planning needed in order to retain most of their bonus and royalty payments in the future. In an informative hour and half presentation, Peggy Hall, Agriculture Law Professor at OSU, and Dave Miller, accountant and former OSU Extension Farm Management Specialist, lectured the crowd on everything from asset planning to upcoming tax implications.
The purpose of the program was to help mineral owners start thinking about the financial implications of oil and gas leasing. As Thomas Edison once said “Good fortune is what happens when opportunity meets planning.” Planning for new wealth will help protect farmers and landowners from being surprised when Uncle Sam and Uncle John come knocking on your door around tax time.
Asset planning will be needed from bonus payments to royalty payments. Asset planning can include tax planning, business planning, estate planning, investment planning, charitable giving, retirement and debt retirement. With so much asset planning, landowners may be overwhelmed with properly planning for their future.
When taking on so many new responsibilities landowners need to know they are not alone. Hiring a professional advisor is the best route to take when trying to alleviate the headaches that come with planning. Don’t just open the phone book and pick the first advisor you come across.
There are many factors you need to know when picking an advisor. Consider the importance of experience with oil and gas leases. You may also want to seek out referrals from friends or neighbors who have experience with asset planning. Even though your friends refer advisors, you still must interview candidates to make sure you make the right decision. The rule of thumb is to interview at least three candidates. When interviewing them, it is important to ask not only experience in oil and gas leasing but for references to see how satisfied others are with their services.
When you finally decide on your financial planner, they will help you with investment and tax avoidance strategies. Although there are no true legal ways to hide your money from our state and federal friends, there are a variety of ways to limit your tax burden. Reinvestment into business entities, paying into your retirement plans, savings bonds and “like kind” exchanges like buying new property are great ways to limit your taxes when receiving these large up front payments.
You may also choose to donate to charitable groups like your local church, farm council or a group like the American Heart Association. If you donate to charitable organizations, your money will go to organizations you have a passion for instead of the federal government.
Although getting involved with your financial planner is important, landowners need to know what to expect when the tax man comes to your door. Income tax isn’t the only thing one must worry about. Property taxes, capital gains taxes and estate taxes may also increase with your bonus and royalty payments. Property and capital gains taxes will see an increase with the valuation and sale of your mineral rights. These two forms of taxes are often overlooked when planning for next year’s tax filings.
How much of your money should be set aside for next years tax filings? It is always better to err on the side of caution. To be on the safe side, it is always best to set aside 42 percent of your bonus payment for federal and state taxes. It may sound like a lot, but it is always easier to spend your leftover savings next year than it is to scramble in April for thousands of dollars.
There are a few ways to reduce taxable income. Make sure to keep track of your attorney’s fees when negotiating your lease. Any costs associated with negotiating your lease are tax deductible. Pay your state income taxes before 12/31/11. By paying your state income tax prior to December 31st, you will be able to itemize your deductions for federal taxes. Finally, go to your local treasurer and have them estimate you property taxes for the year before December 31st. If you pay next years property taxes this year, it is considered a deduction for your income taxes.
The presentation was very helpful to the anticipating crowd. Speaking with people as they left, most in the crowd have either just signed their lease in the previous couple of weeks or were expecting to in the next few months. They left with piece of mind and sound advice.