The Impact of Federal and State Income Taxes on Timber Income in the West Following the 1986 Tax Reform Act

Abstract

Nineteen eighty-eight federal and state income tax liabilities for a hypothetical nonindustrial private forest landowner case were calculated for 13 western states. The state portion of the total income tax liability for the passive case (without timber sale revenue) ranged from 15% in Arizona, California, and Colorado to 25% in Hawaii for the medium income level. It ranged from 12% in Arizona and Colorado to 20% in Hawaii for the high income level. The state portion for the active case (with timber sale revenue) ranged from 12% in Arizona and Colorado to 21% in Hawaii, and from 10% in Arizona to 19% in Hawaii for the medium and high income levels, respectively. Federal income tax deductions, capital gain exclusions, and tax rates are the most important state provisions affecting state income tax liability. The installment sale method of reporting timber sale revenue was used as one alternative tax planning strategy. Timber sale revenue was spread over a 2-year period to reduce the amount of taxable income subject to higher marginal rates. In the Oregon hypothetical case, the landowners who elected to use the installment sale method would save $1,240 and $616 at the medium and high income levels, respectively. West. J. Appl. For. 6(1):15-20.