Penn State Live - Tax advice includes reducing bite of natural gas income

Tax advice includes reducing bite of natural gas income

Wednesday, January 28, 2009

University Park, Pa. -- Many people pride themselves in being do-it-yourselfers, even when it comes to preparing their annual income tax returns. A consumer-finance educator in Penn State's College of Agricultural Sciences warns that anyone who has signed a natural-gas rights leasing contract in the past year should avoid the temptation and look to tax experts for filing help.

Gas leasing increased in the state in 2008 after Penn State research revealed that the Marcellus shale, a geologic formation that stretches across a large part of northern and western Pennsylvania and into neighboring states, may contain more than 500 trillion cubic feet of recoverable natural gas, with a value of up to $1 trillion. As gas companies scramble to tap into this potential energy bonanza, Pennsylvania landowners are seeing five- and six-figure cash advances.

Robin Kuleck, a family-finance educator for Penn State Cooperative Extension in Elk County, explained that anyone who's received that kind of money needs a higher level of income-tax help.

"Most do-it-yourselfers are using computer software, and these programs will calculate only the taxes that you owe based on your annual income," Kuleck said. "A paid income tax preparer can only tell you how much you owe or are due in a refund, based on information you provide regarding your past year's financial transactions. They can't advise you of strategies to reduce or avoid taxes. Informing you of current tax laws, how those laws apply to your unique situation, and strategies you can employ to reduce the tax bite on your natural-gas income falls within the expertise of financial professionals, such as Certified Public Accountants (CPAs) and Certified Financial Planners (CFPs)."

Kuleck said whether the landowner does his or her own taxes or uses a paid preparer, consulting a financial professional about the potential tax implications and following up on any recommendations can save hundreds and even thousands of dollars. She noted that the incredibly complex tax code means there is no one-size-fits-all answer to the question of how to reduce the tax bite and how tax laws apply to individual situations.

"Because of the five- and six-digit natural gas payments some families are receiving, they may find themselves in the 25-percent tax bracket this year when they were in the 10-percent bracket just last year," Kuleck said. "They'll be facing key deadline dates, and missing the deadlines can result in having to pay unnecessary federal, state and local taxes on your natural-gas income. Consulting a financial professional as soon as possible will give taxpayers time to consider expert suggestions and develop and implement a plan to minimize the tax bite and maximize the amount of money they have available to meet their financial goals."

Anyone who received natural-gas bonus payments, lease payments or royalty payments in 2008 will be filing a tax return that is significantly different from the previous year's, Kuleck explained. Here are some other factors that shape your 2008 income tax liability:

• How much in natural-gas bonus payments, lease payments and/or royalty payments did you receive by Dec. 31, 2008?

• Did you and/or your spouse contribute to an employer-sponsored retirement plan in 2008? If so, how much did you contribute?

• Did you and/or your spouse contribute to a traditional or Roth IRA for 2008? If so, how much did you contribute?

• Did you and/or your spouse turn 65 in the 2008 tax year?

• Did you and/or your spouse become disabled in the 2008 tax year?

• Are you and/or your spouse considered legally blind?

• Did your household gain or lose a member in 2008?

• How much in federal and state payroll income taxes did you have withheld and how much in quarterly estimated payments did you make?

"Signing bonuses and lease payments receive different tax treatment from the royalty payments, which are subject to expense deductions such as depletion," Kuleck said. "Once you choose how your depletion is calculated -- either percentage or cost -- that decision is irrevocable. This is another area where a financial professional can assist you."

In addition to helping you reduce your current income tax liability, your chosen financial professional also can help you understand your options for how best to use your natural-gas income to meet other current and future financial goals, such as debt reduction, financing college or funding a comfortable retirement.

While there is nothing wrong with being a do-it-yourselfer, Kuleck said seeking and following the advice of a financial professional can not only save you time and money, but also assure that your natural-gas income will meet your family's needs for years to come.