📅 2026 Update: Changes to Severance Taxes

Since the original article on severance taxes was written, there have been several important updates regarding tax laws and deductions. These changes could affect individual taxpayers and their financial planning, especially concerning income and charitable deductions. The earlier article continues further down the page, detailing the basics of severance taxes.

💵 Standard Deduction Increases

For the 2026 tax year, the standard deduction has increased. Single filers and married individuals filing separately can now claim $16,100, up from $15,000 in 2025. Married couples filing jointly or qualifying widows/widowers can now claim $32,200, an increase from $30,000.

Heads of household have a standard deduction of $24,150, up from $23,000.

🎁 New Charitable Deduction

A new provision allows taxpayers claiming the standard deduction to deduct up to $1,000 for single filers and $2,000 for married couples filing jointly in cash donations to qualified charities. This change is effective for tax years 2025 through 2028 and encourages charitable giving among taxpayers.

👴 Senior Tax Deduction

Individuals aged 65 and older can benefit from an additional $6,000 federal tax deduction. This deduction is available regardless of whether the taxpayer itemizes deductions and will apply through 2028.

💼 Changes for Tipped Workers

Tipped employees will no longer pay federal income tax on their tips starting in the 2025 tax year. This change aims to lessen the tax burden for those who depend on tips as part of their income, which can be especially beneficial in the service industry.

📌 Key Updates Summary

  • 💵 Standard deduction increases for various filing statuses.
  • 🎁 New charitable deduction for standard deduction claimants.
  • 👴 Additional deduction for seniors aged 65 and older.
  • 💼 Tipped workers now exempt from federal income tax on tips.

💡 Tips for Navigating Severance Taxes

Reviewing your specific situation with an attorney is important to understand tax implications fully.

📄 Understand Your Deductions

Stay updated on changes to the standard deduction amounts. Knowing the specific amounts can help you maximize your tax benefits when filing.

💖 Utilize Charitable Donations

If you plan to donate to charities, remember that you can deduct a portion of your cash donations even if you take the standard deduction. This can help lessen your overall tax liability.

👵 Take Advantage of Senior Deductions

If you are 65 or older, ensure you claim the additional $6,000 deduction. This can significantly reduce your taxable income and provide more financial relief.

💰 Keep Track of Tipped Income

For those who receive tips, remember that you will no longer owe federal taxes on these earnings. This can lead to a noticeable increase in your take-home pay.

🚘 Consider Vehicle Loan Interest

If you have a car loan, you may be eligible to deduct interest payments. This can be beneficial in lowering your taxable income if you qualify under the income limits.

🏆 Top Tax Services Ranked by User Reviews (2026)

Several online tax services can assist with severance taxes and general tax preparation. These services have been ranked based on Trustpilot data as of October 2026. Ratings can change over time, and while star ratings are helpful, they may not capture all user experiences since unhappy customers often leave more reviews.

🥇 1. TaxSlayer

TaxSlayer has been rated 4.2. It is known for its affordable pricing and online tax preparation services. However, some users have noted occasional technical issues and concerns about pricing transparency, which may affect the overall experience.

🥈 2. 1040.com

1040.com holds a 4.5 rating. Users appreciate its user-friendly interface and flat-rate pricing. Despite this, some reviewers mention navigation challenges and technical glitches that can disrupt the filing process.

🥉 3. efile4Biz

efile4Biz averages 4.7. It is recognized for easy online filing and affordability. However, users caution about occasional navigation issues and limited support options, which can impact user experience.

🆓 Free Tax Assistance Options

The IRS offers several free tax assistance programs. The IRS Free File program provides free online tax preparation for eligible taxpayers with an adjusted gross income of $73,000 or less. Additionally, Volunteer Income Tax Assistance (VITA) offers free help to low-income individuals and Tax Counseling for the Elderly (TCE) specializes in assisting seniors.

🔎 Choosing the Right Tax Service

  • ⭐️ Compare user reviews and ratings.
  • 💰 Look for services that fit your budget.
  • 🔍 Evaluate support options and availability.
  • 📄 Check for additional features like free filing programs.
  • 📝 Confirm the ease of use and navigation of their platform.

❓ Frequently Asked Questions

📅 What is the deadline for filing taxes in 2026?

The deadline to file individual tax returns for the 2025 tax year is April 15, 2026. If this date falls on a weekend or holiday, the deadline is typically extended.

💵 Can I deduct charitable donations if I take the standard deduction?

Yes, taxpayers who claim the standard deduction can deduct up to $1,000 for single filers and $2,000 for married couples filing jointly in qualified cash charitable donations.

👴 Who qualifies for the senior tax deduction?

Individuals aged 65 and older are eligible for an additional federal tax deduction of $6,000, available whether or not they itemize deductions.

💼 What changes affect tipped workers?

Starting with the 2025 tax year, tipped workers will no longer pay federal income tax on their tips, which can significantly impact their overall income.

🚘 Is the car loan interest deduction applicable to everyone?

The car loan interest deduction is available for tax years 2025 through 2028 and allows individuals to deduct interest on loans for qualified vehicles, subject to income limits.

📄 How can I get free tax help?

The IRS offers a Free File program for those with an adjusted gross income of $73,000 or less. Additionally, VITA provides free tax help for individuals earning $60,000 or less, and TCE offers assistance for seniors aged 60 and older.

⚖️ Recent Court Cases on Severance Taxes

Recent court rulings have impacted how severance taxes are applied and enforced. These developments can affect taxpayers and their obligations related to severance taxes.

For more information, you can browse more rulings on the news page.

End of October 2026 Update





Severance Taxes at a Glance: An Overview of the Taxation on Non-Renewable Resources

Natural resources that cannot be replenished and are limited in supply, such as coal, oil, and gas, are considered non-renewable resources. They play a significant role in the economy, but their exploitation can also cause environmental harm and other social costs. Governments have devised various policies to manage their extraction and use, and one such policy instrument is through taxation in the form of severance taxes. This article will provide an overview of severance taxes, their rationale, design, and current trends in the United States.

What are Severance Taxes?

Severance taxes are taxes imposed on the extraction of non-renewable resources from the earth, such as oil, coal, natural gas, and minerals. Unlike income taxes, which are based on profits from selling resources, severance taxes are levied on each unit of resource extracted, either by volume or value. The tax rate is determined by the government, usually at a fixed percentage of the resource's price or value, and varies by state or country. Severance taxes are also called depletion taxes, excise taxes, or resource taxes in some jurisdictions.

Severance Taxes at a Glance

Why are Severance Taxes Important?

Severance taxes serve several purposes, both fiscal and non-fiscal. First, they generate revenue for governments that rely on resource extraction as a significant part of their economy. This revenue is used to fund public services, such as education, healthcare, infrastructure, and environmental conservation. Second, severance taxes can serve as a form of compensation for the depletion of non-renewable resources, which are finite and belong to the public. They can also mitigate the social and environmental costs associated with resource extraction, such as land disturbance, water contamination, and air pollution. Finally, severance taxes can also discourage over-extraction and promote sustainable resource management, by making the cost of extraction higher and encouraging companies to invest in alternative forms of energy.

How are Severance Taxes Designed?

The design of severance taxes varies depending on the type of resource, its market price, and production costs. Some states or countries use ad valorem taxes, which are based on the resource's market value, while others use volume-based taxes, which are based on the amount of resource extracted. The tax rate can be a fixed percentage of the resource's price or vary based on production levels, quality, or location. Some jurisdictions also use a combination of various tax forms, exemptions, and deductions, to incentivize certain types of production, stimulate economic growth, or reduce environmental impact.

For example, Alaska's oil severance tax is based on the volume of oil extracted, with a rate that increases as production declines. The tax rate can also vary based on the price of oil, to adjust for market fluctuations. However, Alaska also offers several exemptions and deductions, such as a credit for hiring in-state workers, a tax holiday for new oil production, and a tax credit for investing in certain projects. In contrast, Wyoming imposes a flat severance tax on coal mining, with a rate of 7% of the sale price, regardless of the volume or location of production.

What are the Current Trends in Severance Taxes in the US?

The use of severance taxes in the US has been declining over the past decades, as many states have reduced their rates or phased them out. One reason for this trend is the changing economics of resource extraction, which have made it more expensive and less profitable to extract certain types of resources. For example, the decline in the price of natural gas has made it less lucrative for companies to drill for gas, leading some states to reduce their tax rates or offer incentives to encourage production. Similarly, the rise of renewable energy sources has reduced the demand for coal and oil, leading some states to shift their focus to other sectors or reduce their reliance on severance taxes.

In recent years, some states have also debated increasing their severance tax rates, to generate more revenue or address environmental concerns. For example, Colorado voters approved a ballot measure in 2020 to increase the state's oil and gas severance tax from 2% to 5%, with the additional revenue earmarked for education and environmental projects. Similarly, New Mexico passed a new law in 2019 that raised the severance tax rate on oil and gas production from 3.75% to 5%, with the revenue going towards early childhood education and other state programs. However, such proposals often face opposition from industry groups, who argue that higher taxes would make it harder for companies to compete and invest in new projects.

Conclusion

Severance taxes are an important policy tool for managing the extraction of non-renewable resources, generating revenue, and mitigating social and environmental costs. The design and implementation of such taxes vary widely depending on the type of resource and the context of production. While many states have reduced their severance tax rates in recent years, some are also exploring ways to increase them to address various challenges. As the global energy landscape continues to evolve, it will be interesting to see how severance taxes and other resource management policies adapt to meet the changing needs of the economy and the environment.


Severance taxes are imposed on natural resources, such as trees, gasoline, coal and similar items. The tax is only imposed when those natural resources are used in a state, other than the state from which they came.

If lumber were harvested from New Jersey, and then used in New Jersey, the severance tax would not apply. If however, that lumber were used for construction in New York, severance taxes would apply. In most states however, severance taxes only apply to non-renewable resources. In those states, there would not be a severance tax on lumber, though that is likely to change in the immediate future.

The severance tax is not the burden of the entity making the purchase. There may be an additional sales taxes imposed on the natural resource and that tax would be the responsibility of the consumer.  However, the severance tax is imposed on the company that harvests the natural resource.

The severance tax is imposed at a flat rate, based on productivity in regards to a particular natural resource. For example, oil may have a severance tax imposed on a per barrel basis.  If that company only sells the natural resource in the state where it is harvested, they do not have to pay a severance tax. Severance taxes are utilized as a means of keeping non-renewable resources in state boundaries, while keeping the cost to consumers in that state lower.

The severance tax is different from the income tax and other corporate taxes. Companies that make no profit from the sale of the harvested natural resources, still may be subjected to the severance tax. In fact, any person that has a financial interest in a company that harvests natural resources, would be subject to severance taxes.

Generally, the tax is imposed on the volume of natural resources. For example, an oil well may be have severance taxes based on the amount of oil sold from that pump. In fact, recent reports suggest that British Petroleum will be responsible for a tax, much like severance taxes, on the amount of oil pumping into the ocean each day. The oil spill and impending disasters, is a good example of why the severance tax can sometimes be used to discourage abuse of natural resources.

Severance taxes are utilized to protect non-renewable natural resources. The tax revenue is sometimes used to fund programs to protect the environment. However, the government can use the revenue from severance taxes in any way they see fit.

📝 See Also