Tax question

Looking for some knowledge. Leased mineral rights in '16. Accountant putting bonus as a high tax bracket due to “lease”. does anyone have advise as to how to account for the lease bonus for tax purposes that won’t put us into a 34% tax bracket?

First, congratulations on getting a good bonus income in 2016. Second, as your income is rises, the marginal tax rate rises. This means that some income is still taxed at lower rates, but each time your income goes over a specified amount, your tax rate increases on the difference. Married, filing jointly, the rates go from 10% up to 39.5% on each increasing segment of income. Not all income is taxed at the top rate, just the income increase. For example, the portion of income from $151,900 to $231,450 is taxed at 28%; and the portion of income from $231,450 up to $413,350 is taxed at 33% and the portion of income from $413 to $466,950 is taxed at 35%. Above that, each dollar is taxed at 39.6%. Lease bonus is taxed at ordinary income tax rates and to the extent that it pushed your income over $231,450, your rate on that went to 33% or more. Lease bonus is not subject to depletion, only royalty income will get that treatment.

Thank you for the info. I was aware of the increase, but not the ranges. I think my accountant placed the income increase differently than ordinary income. This will help. Thank you.

Most likely your accountant is using a tax program which will total the income and calculate the income taxes accordingly. You should sit down with your accountant and go through the return in detail. It is always good to have a thorough understanding of how your taxes are calculated and determine if you have any additional deductions. Most lessees will report the bonus income as rental on 1099 form and then the income is reported on Schedule E. You can deduct any direct expenses associated with the lease, including fees for legal advice. If the bonus income was erroneously reported as earned income, then you need to have the lessee change the category. Otherwise, you will be assessed self-employment taxes.