Whether the topic has been drought, yields or tax policies the uncertainty of the 2012 year looks to be constant until the end. However, with December 31 fast approaching, it's time to review the income tax planning options available to you. There are also several items to watch depending on what Congress does.
Tax rules for 2012 are pretty much set. However, some huge uncertainties remain, especially for 2013, depending on how Congress will address the impending fiscal cliff.
"Remember, your tax plan should minimize tax liability over time, so it's important to think about how future tax legislation may affect your options," says Kent Vickre, state coordinator for the Iowa Farm Business Association. Based at Ames, the IFBA offers record keeping and income tax services for farmers.
Common tax adjustment options you can use for 2012 income
There are a number of most common "adjustment" options a cash basis producer can use to adjust income, says Vickre. He provides the following guidelines. If you have questions or want more information, you can contact him at [email protected] or 515-233-5802. IFBA is located at 2515 University Blvd., Suite 107, Ames, Iowa 50010.
Prepay operating inputs. Be sure to specify a quantity and price of purchased inputs. Remember, prepaid expenses are limited to 50% of deductible expenses.
Pay your children a reasonable wage for farm work. You don't have to pay Social Security tax on your children under age 18. You must file the appropriate payroll tax forms.
Pay any accrued interest. That's another potential tax saver some farmers overlook.
Consider income averaging. Depending on the prior years' taxable income, using income averaging may decrease your tax liability.
Double up on church or charity contributions. If you itemize, consider donating more to charities; or paying state income tax in December instead of waiting until the following year.
Review CCC loan tax treatment. If you have "sealed grain" carrying over at year-end, simply electing to change the tax treatment may increase or decrease your taxable income. You may need to file additional forms with your return.
Capital assets. Consider purchasing needed capital assets such as equipment, buildings or breeding livestock. The federal depreciation rules are described below; however, each state decides if it will couple or decouple from these. Check on the depreciation rules for your state.
Bonus depreciation for purchased capital assets. An additional first-year depreciation deduction is equal to 50% of adjusted basis for qualified property. This is available for both regular income and alternative minimum tax, or AMT. A general description for qualified property is:
~~~PAGE_BREAK_HERE~~~* MACRS (Modified Accelerated Cost Recovery) property with 20 years or less recovery period
* Original use required by taxpayer (new)
* Property must be placed in service before Jan. 1, 2013
Use the "quick write off" depreciation for purchased capital assets. For 2012, the Section 179 deduction is $139,000. The 179 election is limited to qualified capital purchases for items such as equipment, grain bins or breeding livestock with a dollar-for-dollar phase out starting at $560,000. Additionally qualified items that exceed the $139,000 are eligible for regular depreciation.
Fund your retirement account--IRA, SEP, Keogh. Because some plans need to be set up by Dec. 31, be sure to check into this now.
Defer crop insurance proceeds. You may elect to defer income to the following year if you meet specific conditions, such as:
* You use the cash method of accounting.
* You receive the crop insurance proceeds in the same year the crops were damaged.
* You can show that, under normal business practice, you would have included income from the damaged crops in any tax year following the year the damage occurred.
Also, only crop insurance proceeds paid because of crop damage or the inability to plant crops are eligible for the deferral under Internal Revenue Code 451(d). Thus, crop insurance payments based on low county yield such as Group Risk Income Protection, or GRIP, aren't eligible for deferral. Additionally, payments made for a decline in the price of the commodity, rather than a physical loss, do not qualify for deferral.
Insurance policies that have both a yield and price component such as Revenue Protection, or RP, will require a separate calculation. To calculate the deferral amount, you must calculate a percent of physical loss compared to the total loss. The formula for this calculation would be: physical loss divided by (physical loss + price loss).
~~~PAGE_BREAK_HERE~~~For more information see the "Tax and Legal Issues Associated With the 2012 Drought" article written by Roger McEowen, ISU Center for Agricultural Law and Taxation.
Items to watch for 2012 and 2013: keep an eye on Congress
As we go to press with this article on November 14, Congress hasn't passed an Alternative Minimum Tax patch for the 2012 year. The AMT patch can be a confusing topic. However, a good place to start the explanation is with the name itself. The "Alternative Minimum Tax" uses an alternative set of tax rules that (in theory) calculates the minimum tax liability based on income. Because AMT is not indexed to inflation, an increasing number of middle income taxpayers could find themselves subject to this additional tax without a 2012 patch. Watch to see if Congress acts to put a patch in place.
What about 2013? Here are several changes set for 2013 that could impact a producer's 2012 tax planning decisions:
* Bonus depreciation for purchased capital assets. This is not available in 2013.
* "Quick write off" depreciation for purchased capital assets. The Section 179 deduction limit is reduced to $25,000.
* Medicare surtax. Beginning on Jan. 1, 2013, "high income" tax- payers will be subject to a new Medicare Surtax. The rate and limit depend on the "type" of income.
For earned income this will be an additional 0.9% charge on wage income in excess of $250,000 for a married person ($200,000 for single). This 0.9% surcharge will be added to the current employee Medicare withholding rate of 2.9% for a total rate of 3.8%.
For unearned income this surtax will be 3.8% for a married couple on unearned income in excess of $250,000 based on a Modified Surtax AGI calculation ($200,000 for single). Unearned income examples are interest, dividends, capital gains and passive rental. However, tax-free interest and retirement plan annuities are exempt from the surtax.
* Payroll tax reduction expires. The 2% payroll tax reduction is scheduled to expire Dec. 31, 2012 which will result in employers withholding the 6.2% social security tax from employees vs. the previous rate of 4.2%. In the past, this reduction has caused some confusion for employers, mostly because it's been scheduled to expire several times before being extended at the last minute. If you have employees, watch to see what happens this time.
These are some of the most common strategies and considerations. However, because of tax law changes or pending changes, be sure to review your tax estimate with your tax consultant.
For farm management information and analysis go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farm-management.