From Tina LeBrun
and Wayne Schoper
South Central College
Tina LeBrun & Wayne Schoper
With the early harvest season upon us this year, the time has come to start thinking about tax planning. Unexpected higher commodity prices, expiration of several tax cuts in 2012, and the financial effects of drought-like weather all team up to make tax planning essential this fall for all farm producers. Taking time to plan your tax management should be considered just as important as planning for the next growing season. Prepays of crop/livestock inputs go hand-and- hand with developing a tax management strategy. While paying the government some of your hard earned money may be inevitable this year, keep in mind, having a tax bill means your farm business is successful, although minimizing that tax bill wisely should be the goal for any farm producer. One way to positively affect your tax management is to better understand tax provisions that are changing and can affect farm businesses.
Without congressional action, the tax rules will be very different in 2013 compared to the rules in effect in 2012. Most of the Bush era tax cuts are set to expire at the end of 2012 which will mean a tax increase for most taxpayers.
If these cuts are allowed to expire at the end of this year, long-term capital gains rates will go to a maximum rate of 20 percent, with a special long-term capital gain rate of 18 percent maximum for some asset sales. The 0 percent long-term capital gain rate for low-income individuals will also be replaced with a 10 percent rate, and a special long-term capital gain rate of 8 percent for some asset sales.
These tax cut expirations will also increase ordinary income tax rates. After 2012, the rates are scheduled to increase at both the low and high ends, to 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent. Currently, in 2012 individual income tax rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.
Also, qualified dividends have been taxed at the long-term capital gains tax rates for several years. After 2012, they are to be treated as ordinary income again at the rates mentioned above.
Provisions Taking Effect in 2013
The sale of a large capital item could easily result in additional tax to some farmers with the new Medicare tax. Beginning in 2013, a 3.8 percent tax will be imposed on investment income of certain individuals, estates, and trusts, if the taxpayer's modified adjusted gross income exceeds $200,000 or more for single filers, and $250,000 or more for married taxpayers. In addition, income from sales of investment property, interest income, dividend income, rental income, annuity income and passive business activities will be subject to the additional 3.8 percent tax.
Consider the Options
If you take into consideration the expiration of several Bush tax cuts that increase long-term capital gains rates and include the additional Medicare taxes that will hit high-income taxpayers, you will be hit by both tax increases if you are planning to sell a significant asset, so consider selling the asset in 2012.
Crop Insurance and Disaster Payments
An exception to the general rule that payments must be reported in the year they are received, allows some cash-basis farmers to postpone reporting for one year, the compensatory payments received in the year of a crop loss.
To qualify for the exception, a farmer must use the cash method of accounting and be able to show that, under normal business practice, the income form the crop would have been reported in a year following the year of the crop loss. Farmers who qualify for the exception can choose to report the payment as income in the year it is received or as income in the following year. The election to postpone the income can be made on an original return or amended return. There are other deferral options to consider with crop insurance proceeds so take time to discuss with your Farm Business Management Instructor to find out what situation is best for your own farm operation.
Tax issues can often times be confusing and overwhelming, it is always important to consult with your tax accountant before implementing any strategy to minimize your tax bill. Also, take time to put together a plan that works for the future of your farm business. Don't just plan to pay the least amount of tax possible, buying assets to limit tax hits is not always the best situation for any business growing for the future.