Royalty Income
"Royalties" can generally be described as payments you receive for the use of your property, that are based in some way on the number of units sold.
The two types of royalties most commonly encountered are royalties for the use of copyrights, trademarks, and patents, and royalties from the extraction of oil, gas, or minerals from your property. However, other types of royalties are possible, such as those paid for the use of a name, the sale of products using certain proprietary processes, etc. In any case, income and deductions related to your royalties are generally reported on Schedule E, Supplemental Income and Loss.
However, if you are in business as a self-employed artist, author, photographer or inventor, and the royalties relate to a self-created copyright, trademark, or patent, you would report the payments as part of your business income on Schedule C.
Similarly, if you hold an operating oil, gas, or mineral interest in land, you would report your gross income and expenses on Schedule C or C-EZ. Numerous special rules apply to the ownership and taxation of mineral property, and they're beyond the scope of this Guide. If you own any investments of this nature, we recommend that you consult a qualified tax professional for details.
Tip
Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax� Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.
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