Tax estimator

Oil royalty income tax calculator: what do you actually keep?

Royalty income is taxed as ordinary income — but the 15% percentage depletion deduction and the absence of self-employment tax make the effective rate meaningfully different from what many royalty owners expect. This calculator estimates your 2026 federal income tax, net investment income tax (NIIT), and state tax on royalty income, then shows how much to set aside for quarterly estimated payments.

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What this calculator covers

The 15% depletion deduction

Oil and gas royalty owners can deduct 15% of gross royalty income each year under IRC §613A — regardless of original purchase price. This deduction reduces your Schedule E net income and flows directly into your AGI, lowering both federal and state income tax. For a royalty owner in the 22% federal bracket receiving $60,000/year, depletion alone saves approximately $1,980 in federal tax annually.

Two limits apply in practice: depletion cannot exceed 100% of net income from that property, and total depletion across all oil and gas properties cannot exceed 65% of overall taxable income before the deduction. These caps are rarely binding for passive royalty owners with no other unusual income items.

NIIT and higher-income royalty owners

The 3.8% Net Investment Income Tax under IRC §1411 applies to royalty income when your MAGI exceeds $200,000 (single or head of household) or $250,000 (married filing jointly). Unlike the SE tax exemption above, NIIT does apply to passive royalty interests — so high-earning royalty owners pay both ordinary income tax and the NIIT surtax on their royalty income.

This calculator estimates NIIT only on royalty income. If you have additional investment income (dividends, capital gains, rental income), the NIIT may be higher — your actual NII base is the sum of all qualifying investment income above the threshold, not just royalties.

State taxes vary significantly by state

Texas and Wyoming impose no state income tax on royalty income. Oklahoma, Colorado, West Virginia, North Dakota, New Mexico, Louisiana, Montana, and Kansas all tax royalty income at ordinary income rates ranging from roughly 2.5% to 6.75%. Some states also impose a severance tax — a production-level tax deducted by the operator before your check arrives — which reduces the gross royalty you report on your federal return. Enter your state's marginal income tax rate in the calculator; adjust for severance taxes separately based on your monthly statements.

Setting aside for quarterly estimated taxes

Unlike wages, operators do not withhold income tax from royalty checks. If you expect to owe $1,000 or more in federal tax for the year, you're generally required to make quarterly estimated payments. Many royalty owners find it easier to set aside a fixed percentage from each check as it arrives — the calculator's effective rate gives you a target percentage to save from each deposit. This avoids scrambling for a large payment each quarter when production has been uneven.

Read the full oil royalty taxes guide for detailed examples of depletion math, Schedule E reporting, inherited mineral rights step-up, and the NIIT calculation. If you're evaluating a sale offer, the mineral rights sale calculator shows the pre-tax comparison between keeping royalties and investing proceeds. The royalty wealth guide covers the broader financial planning picture.