LOVELOCK - It's that time of year again, Tax Time. Annual farm income tax preparation is a real challenge with changing tax codes and regulations. This is the year to take advantage of a couple soon-to-expire tax opportunities while striking a balance with your tax liability so you don't hinder your financial situation.
Section 179. This is likely the one and only remaining year to take advantage of the Section 179 deduction limit of $500,000. In 2014, the deduction limit is slated to drop to $25,000 with an adjustment for inflation. For 2013, you can still deduct 50% of the purchase price of new qualified assets (a life of 20 years or less). The 50% bonus depreciation will probably not be available next year.
You want to take the maximum amount of depreciation available in 2013 because if you use normal depreciation methods, a tractor, for example, will be depreciated over a seven-year period. Do you know what tax bracket you'll experience in 2015?
Taxable income target. Every operation should have a taxable income target, which is based on tillable acres and yield, as well as other enterprise income such as livestock, trucking, custom farming, etc. Your goal is to hit the optimum taxable income each year so that you don't pay 15 percent one year and then jump to the 33 percent bracket the next when you should be in the 25 percent bracket both years.
Any new farm bill will likely eliminate direct payments. With that in mind, defer the higher incomes of 2013 to 2014. Prepay expenses to hit your target income this year. Loss of funds to income tax is the poorest expenditure you can make.
Self-employment tax. Most farmers pay more self-employment tax than income tax. Once you hit the maximum self-employment tax income ($113,700 for 2013), you only pay the Medicare portion of self-employment tax (currently 2.9%). While you can carry back or forward a net operating loss for income tax purposes, if you carry back a loss, it does not apply to self-employment tax calculations.
Medicare premiums. A couple years ago, the Internal Revenue Service announced that all Medicare premiums are insurance constituting medical care and can be deductible as self-employed health insurance for qualifying active farmers. Taxpayers are eligible to file an amended return for all open years (2010, 2011 and 2012) to benefit from this deduction.
Some changes with capital gains tax rates may affect some farms and especially those considering retirement and passing the farm on to the next generation or selling the farm outright. There are two types of capital gains and multiple rates. The two major types of capital gains are usually referred to as short-term and long-term.
Short-term is applied to those investment(s)/asset(s) held for one year or less (or in the case of cattle or horses, 24 months). The taxable rates for these are treated at the ordinary income tax rates (0 percent - 39.6 percent)
Long-term capital gains rates have changed by adding a new 20 percent bracket plus a possible 3.8 percent Medicare tax on net investment income brought on by the Affordable Care Act. For the 2013 and future years, long-term capital gains rates are as follows:
• Capital Gains Rate of zero percent for capital gains income that falls within the 10 percent or 15 percent income tax brackets.
• Capital Gains Rate of 15 percent for capital gains income that falls within the 25 percent, 28 percent, 33 percent or 35 percent income tax brackets.
• Capital Gains Rate of 20 percent for capital gains income that falls within the new 39.6 percent tax bracket.
For those who are married filing jointly with a modified adjusted gross income of $250,000 ($200,000 filing single or $125,000 married filing separately) will have an additional 3.8 percent tax applied to net investment income. Most farms do not normally have to worry about this but there are some possible scenarios where this may come into effect.
Typically, the sale of an asset that is used in a trade or business is not considered net investment income, including farm ground that is being used directly by the producer. But if a producer were to retire and lease their farm ground out and the land owner is no longer filing a Schedule F (Form 1040) and sells the land, the income would be considered derived from an investment since it was no longer being used in a trade or business by the property owner.
For information, see the IRS Farmers Tax Guide at www.irs.gov/uac/Publication-225.[[In-content Ad]]
