The Impact of Federal and State Income Tax Liabilities on Timber Investments in the Midwest and Northeast

Abstract

Abstract Federal and state income taxes are calculated for hypothetical forest landowners in two income brackets across 23 states in the Midwest and Northeast to illustrate the effects of differential state tax treatment. The income tax liability is calculated in a year in which the timber owners harvest $200,000 worth of timber. State income taxes ranged from highs of $13,427 for middle-income landowners and $18,527 for high-income landowners in Maine to no tax burden in New Hampshire and South Dakota. Calculated state and federal income taxes are based on 2004 tax regulations and rates. After-tax land expectation values calculated for a forest landowner in the Northern Lower Peninsula of Michigan illustrate the importance of tax planning on returns to a timber investment. The results support the need for adequate tax accounting.