Timber sale taxes are relatively obscure IRS and SALT taxes. These taxes apply to all taxpayers, whether they’re retired, aren’t business owners, or receive Social Security benefits. Non-compliance can result in unexpected taxes and penalties that accumulate quickly.
Why are the timber sale taxes obscure?
The IRS directs information about timber sale taxes toward individuals and businesses in the timber or timberland management business. Most of these taxpayers work closely with a CPA tax specialist. The most current IRS.gov link provides only minimal information:
Use this form [Form T (Timber)] to provide information on timber accounts when a sale or deemed sale under Internal Revenue Code sections 631(a), 631(b), or other exchange has occurred during the tax year.
More detailed, yet general, tax information relative to timberland management and timber sale taxes is found on the National Timber Tax Website which opens with this greeting:
The National Timber Tax Website was developed to be used by timberland owners, as well as a reference for accountants, attorneys, consulting foresters and other professionals who work with timberland owners regarding the tax treatment of timber-related activities.
Simply put, timber management and timber sale taxes involve multiple agency regulation and have far-reaching tentacles that require highly specialized tax management.
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What does this mean to the average DIY taxpayer?
Hopefully, nothing, but sadly, that’s not the case. Most taxpayers dealing in timberland business know they can’t manage IRS and SALT laws and timberland management regulations alone, and work closely with their CPA tax specialist. Businesses and individuals dabbling in timber sales face devastating tax problems.
Who dabbles in timber sales, and what does dabble mean? Merriam-Webster’s definition is “to work or involve oneself superficially or intermittently…“
Some examples of dabbling in timber sales could include selling:
- timber or logs
- Christmas trees (wholesale or choose-and-cut)
- landscape trees
To help show how far-reaching these tax consequences can be, I’ll create Bob. Fictional Bob and wife Betty fit the definition of taxpayers who “dabbled in timber sales” stumpage or as logs?:
Retired Bob inherited the old home place on 150 acres of wooded and cleared land. To continue his pre-retirement lifestyle, he supplemented his Social Security with additional funds from his retirement annuity account. Betty, who retired briefly, returned to work, paused her Social Security, but dips into her annuity for travel. After Bob began feeling a financial pinch, he jumped on a pulpwood company’s offer of over $50k for trees.
“Timber sales taxes? I’m retired, I don’t have a business.”
Bob and Betty could remain beneath the IRS radar for a few years before red flags attract attention and result in problems:
- Contrary to Bob’s opinion that the $50k is “found money,” the IRS wants their piece of the action. It doesn’t matter that the trees were on his property or that he’s on Social Security and doesn’t operate a business, the $50k is subject to taxation.
- As inherited property, timberland and the sale of timber assets, have more consequences than most people recognize. Timberland is usually a “highly appreciated asset,” that is, the fair market value of the property on the date of death of the decedent is much greater than the basis of the property.
- The IRS may not notice the red flags for some time, but taxes and penalties are accumulating and growing.
- The purchaser of the “trees” was under no obligation to talk with Bob about his financial, tax and retirement planning. Further, the IRS is not overly sympathetic toward taxpayers who don’t do their homework.
- Reforestation expenses to plant trees on cut-over timberland is the owner’s responsibility. This could include building fences to keep deer from eating stump sprouts and seedlings. Unexpected expenses such as these could amount to tens of thousands of dollars and result in staggering setbacks.
- Bob and Betty were comfortable with their annuities which were set up to provide income for the remainder of their lives. However, withdrawals in excess of the annuity plan generally change the outcome and increase tax obligations.
- Bob inherited the property and he and Betty plan on handing it down to their sons. The results of this timber sale, however, could change everything.
Annuities, Timber Sales, Estate Trustee Responsibilities
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Are you a DIYer?
During the next 25 years, an anticipated $60 trillion in assets will pass between generations in trust funds alone. The total value of assets to be moved is incomprehensible. Yet many taxpayers trust themselves to know and apply tax laws better than the IRS or a CPA tax specialist.
Our fictional Bob and Betty are DIY tax preparers and they’re definitely not alone. The IRS reports that:
- The number of US taxpayers who self prepare and efile their own tax returns has continued to grow. In 2019 (for Tax Year 2018), over 56,214,000 million taxpayers have prepared and efiled their federal tax returns themselves as of May 2019.
The lure of a quicker refund of any amount resulted in refunds via direct bank deposits:
- As of May 2019, over 86,965,000 million taxpayers have received faster federal tax refunds via direct bank deposits into bank accounts through electronic bank transfers. The average tax refund received by direct deposit is $2,868.
Just like our fictional Bob and Betty, many of these taxpayers will have tax consequences they never anticipated.
The bottom line
If you want the control you need and want, as your CPA financial and tax specialist, I help you manage and control your overall financial life goals. It’s that simple.
I earned my reputation as The Radical CPA
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