The Impact of Federal and State Income Taxes on Forest Landowners: An Examination of Tax Liabilities and Tax Planning

Federal and state income tax laws pertaining to forest landowners are examined. Income tax liabilities are calculated for hypothetical forest landowners in two income brackets across the 41 states in the U.S. which impose a comprehensive income tax. The income tax liability is calculated to illustrate the effects of differential state tax treatment on a representative forest landowner with two different income levels ($50,000 and $110,000) who harvests $200,000 worth of timber in a given tax year. After-tax land expectation values for a forest landowner are also calculated to illustrate the effects of tax planning on returns to timber investment over time.Twenty-eight states utilize the federal adjusted gross income (AGI) as their tax base. Thirty-three states provide a personal exemption in the form of a credit or deduction. A standard deduction is allowed in twenty-six states. The minimum tax rates range from zero percent in Delaware to six percent in Minnesota and North Carolina. Maximum rates range from 4.5 percent in Connecticut to 11 percent in Montana. Four states allow a capital gains exclusion while two others have maximum capital gains rates that are lower than the highest ordinary state tax rate.In the South, landowners have the lowest state tax liability in Louisiana and the highest liability in North Carolina for both income levels. In the Midwest and Northeast, landowners in the medium income ($50,000) level have the lowest tax liability in North Dakota and the highest in Minnesota. Landowners in the high income level ($110,000) have the lowest tax liability in Pennsylvania and the highest liability in Minnesota. In the West, medium-income level Idaho and Montana landowners have the lowest and highest state tax liabilities, respectively. High level income landowners have the lowest liabilityin Arizona and the highest liability in Montana.The effects of tax planning on a forest landowner's potential revenues are calculated using land expectation methodology. Six different scenarios are used to examine the effect of common omissions and mistakes made by a typical landowner. In each successive scenario, the landowners forego certain tax benefit(s) that, in turn, lower their LEV. Different representative state tax rates and discount rates are used as a sensitivity analysis to find a range of values that could potentially occur. The treatment of timber revenue as an ordinarygain provides the largest decline in land expectation value in most cases.