How much should I set aside for taxes from money we receive from gas wells?

Question

My husband and I receive a check each month from his mother, who has allowed a natural gas company to build wells on some laskeside property she and her brother own. The money she receives from what the gas wells yield is divided among herself and her three kids. I know the money isn't "gifted" because they're drawn on a business account she created solely for the gas well checks and we received a form last tax season to submit to the IRS. We didn't owe much last year because we had only been receiving the checks for about 3 months. Now that it's been a year, I have no idea what to expect and I want to be able to put away an amount each month so we can be prepared at tax time next year.

Does anyone know or can anyone tell me where I can find out how much I should be putting aside each month?

Thanks in advance!

Answer 1

To elaborate a little on Bostonian's answer, if Mom set up a business for the well income and sold or gave part of the ownership to the children, then Husband does have a legal entitlement to the money. (Of course, the original transaction carries its own tax consequences; consult a knowledgeable CPA.) The exact treatment would also depend on the form of ownership. Again, a knowledgeable CPA can help.

Oil and gas is a specialty, which not a lot of CPAs have experience with. You can have a royalty interest or a working interest, and each of them is treated differently for tax purposes. Each of them allows a deduction for depletion (which doesn't require a cash outlay), but the limits are different for each. For this reason, do NOT go to H&R Block or a similar chain for help with this! Interview your CPA candidates carefully, and be sure they've got experience in this area. It's not something that's easily learned by 10 minutes reading something online.

Depending on your state of residence, and on the state in which the well is located, you could also have some state tax issues.

Good luck.

Answer 2

Not enough information to say. If your husband is not on the deed to the land and is not a party to the lease, he has no legal entitlement to the money. If that's the case, the money actually IS a gift.

A much more likely scenario is that she set up a trust. If she set up a trust and if you and / or he are beneficiaries of the trust, then it's taxable. How it is treated will depend. You'll receive a Schedule K-1 that lists the money paid and how it should be treated, i.e. ordinary income, capital gains, etc. as well as any deductible items that pass through the trust such as depletion allowances, etc.

If the amounts of money are significant, you'll need to either make estimated tax payments on Form 1040ES or arrange for additional withholdings from your W2 jobs to cover the tax liability on the payments.

Answer 3

capitol gains tax...if you set aside 1/3 that should be enough. Your accountant knows exactly.