Again, it is that time of year to start thinking about submitting your taxes for 2017. The following article has a few tips from Paul Neiffer, Top Producer columnist and principal at Clifton Larson Allen, on preparing for 2017 taxes and getting the breaks you deserve.
• Keep Accurate Records. Your accountant can only work with information you provide. If records are incomplete, you could end up paying more taxes than needed.
• Pay Your Kids. “If you are a Schedule F farmer with children under age 18, make sure to pay them what they really earned this year,” Neiffer advises. “Children with no other income can earn about $6,000 this year tax-free (some states might require a little bit of tax). No payroll taxes are owed.” Children can take those earnings and contribute them to a Roth IRA. If your child puts $5,000 into a Roth IRA at age 17 and lets it compound until age 65, it will grow to about $80,000.
• Be Generous. If you do not itemize and plan to give money to your church or a charity at year’s end, consider giving a commodity gift instead, Neiffer says. This will reduce taxable income as well as your self-employment tax burden if you file a Schedule F or are a partner. Similarly, consider gifting grain to your child. “You reduce your self-employment tax, and if they hold the grain for at least a year after harvest, it will qualify for long-term capital gains treatment,” he says. “Gift a prior year crop, not the current year crop.”
• Sell Some Grain. Consider selling some grain on a deferred payment contract. “This gives you flexibility after year-end if you need to bring income into 2018,” Neiffer says.
• Be Specific. If you plan to prepay expenses to reduce your tax liability, keep in mind those expenses must be earmarked for a specific quantity of a specific product. Ask your input company to give you an invoice.
• Plan Ahead. Determine if it makes sense to make an estimated tax payment on Jan. 15 and pay the remainder on April 15. That could be better for your cash flow than filing and paying your entire tax liability at once.
Obviously working with a tax professional is key to getting it right. However, having the right information is just as important. The following items highlight a number of administrative and tax law changes for 2017:
• Standard mileage rate for 2017. The standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 53.5 cents.
• Increased section 179, expense deduction dollar limits. The maximum amount you can elect to deduct for most section 179 property you placed in service in 2017 is $510,000. This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2,030,000.
• Disaster losses. A new Section D has been added to Form 4684 to make an election (or revoke a prior election) to deduct a loss attributable to a federally declared disaster in the tax year immediately before the disaster year.
• Maximum net earnings. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax is $127,200 for 2017, up from $118,500 in both 2016 and 2015. There is no maximum limit on earnings subject to the Medicare part (2.9%) or, if applicable, the Additional Medicare Tax (0.9%).
• Social security and Medicare tax for 2017. The social security tax rate is 6.2% each for the employee and employer, unchanged from 2016. The social security wage base limit is $127,200. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2016. There is no wage base limit for Medicare tax.
• Qualified small business payroll tax credit for increasing research activities. For tax years beginning after December 31, 2015, a qualified small business may elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer's share of social security tax. The portion of the credit used against the employer's share of social security tax is allowed in the first calendar quarter beginning after the date that the qualified small business filed its income tax return.
Therefore, if you cultivate, operate, or manage a farm for profit, as either owner or tenant you are in the business of farming. A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards and groves. The 2017 Farmer's Tax Guide, Publication 225 explains how the federal tax laws apply to farming. Use this publication as a guide to figure your taxes and complete your farm tax return. IRS Publication 225: https://www.irs.gov/pub/irs-pdf/p225.pdf
