Planning for end-of-life costs and expenses

A common misconception in farm estate and succession planning is that an estate plan is only used after an individual passes away, when in fact, a comprehensive estate plan considers long-term care needs, health care directives, and more. The October Ag Decision Maker article and replay of our recent Women Managing Farmland webinar provides further insight on End-of-Life Taxes and Expenses, both provided by by Kitt Tovar Jensen, staff attorney for the Center for Agricultural Law and Taxation and Beginning Farmer Center coordinator.

Women Managing Farmland – Webinar Series

This bi-monthly webinar series addresses several topics where women farmland owners have indicated an interest. The series is presented over the noon hour and is free and open to everyone. Register here for one or more of the CARE Women Landownership Series webinars.  Additional details can be found on the ISU Women in Ag website.

February 8 | Importance of Using a Written Lease | Melissa O’Rourke
April 12 | Building Your Professional Team | Kitt Tovar Jensen
June 14 | Keeping the Ground Covered | Catherine DeLong
August 9 | Landowner-Tenant Communications | Ann Johanns
October 11 | End-of-Life Taxes and Expenses | Kitt Tovar Jensen
December 13 | Slowing Water Down | Catherine DeLong

Ag Decision Maker (AgDM)

An agricultural economics and business website.

Income Tax Problems in 2020?

Contributed by Charles BrownExtension Farm Management Field Specialist, crbrown@iastate.edu

Charles Brown headshot

Market Facilitation Payments (MFP), Coronavirus Food Assistance Program (CFAP 1 & CFAP 2), Paycheck Protection Program (PPP), Syngenta payments, ARC/PLC payments, crop insurance, etc. have pumped close to $40 billion into the US farm economy in 2020. If you are thinking of deferring any of these government payments, only crop insurance may offer the possibility of deferral. In February of 2020, the USDA was predicting a reduction in US farm income, but now is predicting growth in farm income, up to $115 billion.

This increase in government income could cause some unexpected tax consequences for some farmers this year. Even though crop and livestock prices were low for much of the year, they have now improved and coupled with government payments, farm income is looking better than expected.

If you happen to be in the group that is having a good year and may be better than expected, what can you do to manage your income and income taxes? Here are a few tips that you may use to manage your income.

Prepay expenses: This only works for cash basis taxpayers, not accrual. Some examples that you may prepay are seed, fertilizer, chemicals, feed, up to 12 months land rent that is coming due and any accrued business interest. You must have a business reason for doing so, such as to lock in a price or to insure supply. Tax avoidance is not a good business reason.

Defer income: Using deferred payment contracts for grain sales gives you a lot of flexibility. If you like the price today, you can lock the price in, but take the payment in 2021. The added flexibility is that if you are a cash basis taxpayer and find that you needed the income in 2020, you can pull the contract back into 2020 from 2021 and report the income in 2020, even though you will not receive the cash until 2021. There is a catch, you must pull back a full contract, you cannot pull back a portion of a contract. To have added flexibility you should have multiple smaller contracts and not just one large one. This allows you to have a better chance at managing your income to a level that you want. The added bonus is that this decision can be made after the end of the year.

Crop insurance also may be deferred if the payment received is due to crop damage and not price loss and you normally would have sold the majority of the crop the following year. Again, this does not work for accrual taxpayers.

Depreciation: There are several options for determining how much depreciation you want to take on new asset purchases. If you want to use accelerated methods you have available Section 179 and bonus depreciation. For 2020, the maximum Section 179 is $1,040,000. Farm machinery, grain bins, solar grids, breeding livestock, confinement buildings and field tile all qualify for Section 179. They have to be used more than 50% in the business of farming and it is an asset-by-asset decision. Section 179 cannot create a net operating loss. If you take more than allowed, the remainder will carry over to the following year. The good news is that unlike in previous years, Iowa now couples with the federal rules.

Bonus depreciation is another accelerated method of depreciation. Unlike Section 179 where you choose how many dollars you expense, with bonus depreciation, it is all or none. You expense either the full purchase price or none of it. It can be used on new or used assets and can be used on 20-year property, such as machine sheds. Bonus depreciation is a class-by-class decision. New machinery is a class life 5, so if you decide to use bonus depreciation on a new machinery purchase, all new machinery you purchased will have to use bonus depreciation. Bonus depreciation can create a net operating loss, unlike Section 179. Iowa did not couple with the federal rules on bonus depreciation, so you may reduce federal income, but not Iowa income.

Bonus depreciation also can be used by land owners receiving cash rent.

Retirement plans: Funding retirement plans will reduce federal income taxes, but not self-employment tax. Some retirement plans to consider may be traditional IRAs, 401Ks, Simplified Employee Pension Plan (SEP), Solo 401K, etc.

Charitable giving: The standard deduction for married filing jointly is $24,800 in 2020. You have to exceed this amount with your itemized deductions before it pays you to itemize. Gifting to charities is one of the itemized deductions, but many farmers do not exceed the standard deduction so their charitable giving does not create a tax deduction. Gifting grain to your favorite charity is a much better option. If you sold the grain and then gifted money to your charity, you would have to pay federal, state and self-employment taxes on the income. When you gift the grain directly to the charity, you do not get a charitable deduction, but also have no income to report and avoid the tax consequences. Ownership of the grain must be transferred to the charity before it is sold. Someone from the charity then makes the arrangement to sell the grain.

College savings plans: Contributing to 529 plans can save Iowa income taxes, but not federal taxes. A single person can contribute $3,439 per beneficiary in 2020. A husband and wife could contribute twice that amount. When the money is withdrawn and used for eligible education expenses, it is not taxed.

These are just some of the ways you can manage taxable income, but everyone’s situation is different. It is advisable to contact your personal tax preparer to determine what is best for your tax situation.

Ag Decision Maker

An agricultural economics and business website.

An agricultural economics and business website.

COVID-19 Resources for Agriculture

While in-person events remain on hold, ISU Extension and Outreach, including Ag Decision Maker, remains committed to serving Iowans. A few resources are included below, and more will be added as needed

Ag Decision Maker

An agricultural economics and business website.

An agricultural economics and business website.

Income Tax Changes for 2019

Charles Brown headshot

Contributed by Charles Brown, Extension Farm Management Field Specialist, crbrown@iastate.edu

The Tax Cuts and Jobs Act (TCJA) was signed into law December 22, 2017. Among many changes, it created new tax brackets for 2018 thru 2025. It also eliminated the deduction for personal exemptions and raised the standard deduction in 2019 to $12,200 for single fliers, $24,400 for married filing jointly and $18,350 for head of households. Keep in mind that most of the changes in TCJA end in 2025 and move back to pre-2018 tax law.

Table 1. Tax Brackets and Rates, 2019

Section 179 Expense election was one of the changes that was made permanent. In 2019, this is now $1,020,000 and the phase-out starts at $2,550,000. On Iowa returns, the maximum amount is $100,000 and the phase-out starts at $400,000. In 2020, Iowa couples with the Federal amounts.

One of the other major changes in the TCJA was the repeal of like-kind exchange treatment for traded personal property. Under old law when a farmer traded machinery, the farmer depreciated the difference paid plus any remaining basis on the item traded in and no taxes were due. Under TCJA when a farmer trades machinery, the trade is considered a sale in the amount the dealer allowed for the trade-in, triggering ordinary taxable gain, and the farmer gets to depreciate the full purchase price of the machinery received. If the farmer does not want to pay tax on the gain of the trade-in, they are forced to use Section 179 or bonus depreciation to offset the taxable gain. Iowa did not couple with the Federal change in 2018, but maintained the old like-kind exchange rules. In 2019, for Iowa returns, farmers may use the old rule for like-kind exchanges or use the new Federal rule. In 2020, Iowa will couple with the Federal rule.

If farmers are forced to use Section 179 or bonus depreciation to offset gains from trading machinery, there can be other consequences. Excessive accelerated methods of depreciation reduce net Schedule F income, possibly taking it down to $0 or maybe even a negative situation. IRA and other retirement plan contributions are based on earned income (Schedule F). The deduction for self-employed health insurance is based on Schedule F net income. Contributions for self-employment tax are based on Schedule F net income. Reducing Schedule F income affects money available for retirement planning and other “above the line” deductions taken on the 1040. Also new in 2018 was the new “post card” 1040 Form that also had multiple schedules attached to it. After numerous complaints, there is another new 1040 Form for 2019. This one is a combination of the old 1040 and the 1040 from 2018. Maybe eventually they will get it right. I am not sure I can stand more simplification in our tax code.

Ag Decision Maker (AgDM) AgDM Twitter

An agricultural economics and business website.

Tax Benefits of Employing Your Children

Contributed by Charles BrownFarm Management Specialist, Iowa State University Extension and charlesBrownOutreach, crbrown@iastate.edu641-673-5841

If you operate a business such as farming, employing your teenage children for the summer can not only provide them some spending money and provide them some responsibilities, but can also provide some income tax benefits to the parents.

Making your children employees and paying them wages changes the typical non-deductible “allowance” to a business deduction on the Schedule F. This reduces the federal, state and self-employment taxes the parent has to pay. As long as the child is under age 18 the parent is not required to withhold social security tax. The child’s wages also will not be subject to federal unemployment taxes until the child reaches age 21. As long as the child’s total income for 2014 doesn’t exceed $6200 and their unearned income (investment income) doesn’t exceed $350 they will owe no income tax on their income. If their investment income does exceed $350 and their total income exceeds $1000 then they will have to pay income tax on their investment income. Unearned income (investment income) consists of such things as interest, dividends and capital gains.

Let’s look at an example of how this might work. Consider the parent who agrees to give his son or daughter a $5000 “allowance” for the summer based on the fact that they also agree to do some work around the farm. This could be running errands, doing chores, painting the barn, doing field work, etc. As an “allowance” the parent is out $5000 and has no tax deduction. Change this to an employer/employee relationship and the $5000 becomes a tax deductible wage expense. The tax savings will vary, but for someone who is in the 15% federal tax bracket the tax savings, including federal, self-employment tax, and state tax would be about $1700. So the net effect is that your child’s labor really only cost you about $3300. Again the child would pay no income tax if this is the only income they have.

To adhere to the tax laws, the child should receive a W2 at the end to the year as any other employee would. The child should also be paid a wage that is complimentary to the work being done. Paying the 5 year old for doing field work may not pass the scrutiny of the IRS. Sole proprietors and husband-wife partnerships can pay their children, but corporations have no children, even though they may be children of the stockholders.

As an added benefit of the child now having earned income a contribution could be made to a Roth IRA. The maximum IRA contribution for 2014 is $5500, but can’t exceed the earned income. The parent could make this contribution for the child, but the contribution would also count towards the $14,000 annual gift exclusion or $28,000 if both parents agree.

Contributions to a Roth IRA are not deductible, but all withdrawals after age 59 ½ are not taxable. Contributions of principal can be withdrawn at any time and up to $10,000 of earnings can be pulled out when purchasing your first home. If the child was 15 years old when the $5000 was invested, at 6% interest it would grow to about $80,000 by age 63 or $180,000 by age 75.

Ag Decision Maker (AgDM) 

An agricultural economics and business website.

 

Ag Decision Maker text image

Archives