I guess I was confused by the term "Capitsl Gains" when it all seems to come under the heading of "income"
So if I understand correctly, it is income tax
I believe so, but don’t take tax advice from keyboard jockeys from afar.
Our timber sales and lease bonus payments were treated as income. Just as any home business would be treated.
Royalty Payments
Taxpayers/lessors may receive periodic payments for their share of the natural resource. These payments are commonly known as royalty payments. They must be based on natural resource production on a recurring or intermittent basis, per the terms of the lease.
The lessee should provide the taxpayer with a Form 1099-MISC reporting the payments as “Royalties” in Box 2. Most taxpayers report royalty payments received as royalty income on Schedule E.
more at:
http://www.irs.gov/uac/Newsroom/Tips-on-Reporting-Natural-Resource-Income
If you have some time and want to see where you stand go to
You can do your taxes for free up until you want to either print them out or file electronically, that’s when they ask you for your credit card info. Might take about an hour or so but your situation seems pretty simple and straight forward. They have a good help system, will ask questions step by step and give you a really good idea of where you stand, and they will do your state taxes as well.
I’m going by memory but I believe they ask about royalties from gas and oil exactly like what your question was.
1. An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.
2. Profit that results when the price of a security held by a mutual fund rises above its purchase price and the security is sold (realized gain). If the security continues to be held, the gain is unrealized. A capital loss would occur when the opposite takes place.
And
http://people.opposingviews.com/federal-income-taxation-oil-gas-royalties-9569.html
and when talking to the guy that does my taxes, he said because of my age (66), and the total (projected) annual income, I would be under a federal income guideline and owe no taxes.
After a short conversation with a neighbor, successful and younger, HE said I'd be subject to a 28% capital Gains tax, no matter what my income is.
My take, and please note that I’m not a CPA (my area of expertise is in payroll and payroll taxes) so don’t take this a gospel, but your neighbor, while he is “successful and younger” doesn’t sound to me as if he knows what he is talking about. The guy who does your taxes is “probably” correct but you should verify.
Unless you sold your capital interest in the resource, realizing a gain between your original cost basis (what you paid for it subject to allowable adjustments, expenses) and what you sold it for, then it would be a capital gain subject to capital gains taxes. If the payment is a royalty, I believe it is considered ordinary income, reported on your 1040 on Schedule E as reported on a 1099 under “Royalties”. (and I would note that even if you don't receive a 1099 because it falls below $600, that doesn't mean you don't have to report it on your tax return.)
As to whether you will have to pay taxes on the royalty (assuming that what the payment is), it all depends on a lot of factors such as the amount of the payment, other income you receive and what deductions you are entitled to and things you probably shouldn’t or wouldn’t want to discuss in detail on a public forum. I would also note that while “the guy” who does your taxes “may” be correct with respect to your total projected adjusted income falling below the threshold for having to pay income tax, your age alone (66) doesn’t magically exempt you from paying any income tax.
And your neighbor’s blanket statement regarding 28% being the capital gains tax rate is not even entirely correct. It would depend on whether it was a short term capital gain (which is taxed at the ordinary income tax rate) or a long term capital gain, what tax bracket you fall in and the type of capital gain.
Capital Gains tax rates vary depending on whether the gains are short-term or long-term.
Short-term gains taxed at ordinary income tax rates.
Long-term gains and qualified dividends taxed at
0% if taxable income falls in the 10% or 15% marginal tax brackets
15% if taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets
20% if taxable income falls in the 39.6% marginal tax bracket
25% on Depreciation Recapture
28% on Collectibles
28% on qualified small business stock after exclusion
http://taxes.about.com/od/Federal-Income-Taxes/fl/Federal-Income-Tax-Rates-for-the-Year-2014.htm
Okay. Capital gains are like this. We bought some property in 2000 with the intention of building a house. We didn’t and sold the property in 2012 and made a little money on it (should have sold it at the peak. DOH!) Anyway, since it was classified as a “long term” investment, we owed no taxes on the “gain” we got on our initial “capital” investment.