Tax Saving Down on the Farm
Dec 20, 2013
Crops are harvested, wheat is planted, and most equipment is stored away in the barn after another farming season comes to a close. 2013 is coming to an end, but farmers still have some opportunities left to reduce their 2013 taxable income. Here are a few techniques that could keep dollars in your pocket.
Prepaying Expenses One way of reducing taxable income is prepaying some of your 2014 expenses. Because most farmers are cash basis, when they prepay for items, such as fertilizer, lime, chemicals, etc. they are able to deduct this expense in the year they made the payment. This helps reduce Schedule F income, which in effect lowers both AGI and self-employment tax.
Depreciation Did you buy a new tractor or some other large asset to capitalize? Well then, you are able to take 179 and/or bonus depreciation. 2013 still allows taxpayers to take up to $500,000 in section 179 depreciation for current year assets, and 50% bonus depreciation on new assets. As of now, the $500,000 limit section 179 depreciation will be reduced back down to $25,000, and bonus depreciation will expire all together. Being able to take a full deduction for new equipment can be a huge tax savings. However, if you take a full deduction in the current year you will not have any deduction remaining for future years, so it is important to determine the best short-term and long-term plan
Itemized Deductions Another approach taxpayers can take is increasing their itemized deductions. Making additional charitable contributions, paying large state and local estimates, and prepaying tax preparation fees are all ways to increase one’s itemized deductions. Keep in mind if you are in an alternative minimum tax (AMT) situation then you will not receive any benefit for the prepayment of state and local taxes. Also some of these deductions are limited.
Income Averaging Income averaging rules offer a very powerful tool for farmers and fisherman to take advantage lower tax brackets for both ordinary income and capital gains. This is especially important in 2013 with the new 39.6% bracket for ordinary income and 20% bracket for capital gains. The income averaging schedule allows farmers and fisherman to send back a portion of their current year income to the three previous tax years.
Farmers may also benefit from income averaging by amending prior year tax returns. If they amend, they have the opportunity to push back more of their income, and therefore, reduce their overall taxable liability.
As useful as this tool is, I should mention that it will not reduce self employment tax, the net investment income tax, nor the phase outs of personal exemptions and itemized deductions that come from higher Adjusted Gross Income (AGI).
When looking at these planning techniques, remember that you may have special restrictions with some of these savings so it is always a good idea to make an appointment with your tax advisor to determine what the best approach is for you.
By: Ellie Simon, Accountant