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

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Income Tax Changes for 2019

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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.

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Tax Planning for 2014

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

charlesBrown2014 has ended, but that doesn’t mean that some things can’t be done to increase or decrease taxable farm income. Again, late in the year Congress passed legislation that affected 2014 taxable income. Section 179 Expense Election and bonus depreciation were extended for 2014, but 2014 only. In 2015, the Section 179 Expense Election is back to $25,000 with phase-out starting at $200,000 of qualifying assets and bonus depreciation is gone.

For 2014, the Section 179 Expense Election is $500,000 with the phase-out starting at $2,000,000 of qualifying new or used asset purchases. Section 179 can generally be used on 15-year property or less, which would include farm drainage tile, single purpose ag buildings (confinement buildings), grain bins, machinery, breeding livestock and many farm pickups. You can choose any amount from $0 to $500,000 to be used as a fast write-off in the year of purchase of a single asset or multiple assets, but the aggregate total can’t exceed $500,000. Section 179 can be used on the cash difference paid for the asset. Section 179 must be reduced dollar for dollar for every $1 spent on qualifying assets exceeding $2,000,000. Section 179 reduces both Federal and Iowa taxable income and can reduce business and wage income to $0, but not below $0.

Bonus depreciation can only be used on new, not previously used, asset purchases. Fifty percent of the cash purchase price plus the basis left on any trade-ins can be used in the first year of purchase to reduce Federal taxable income. Iowa does not allow bonus depreciation, so you may reduce your Federal income tax to $0, but could still get hit with a sizeable Iowa income tax. Unlike Section 179, bonus depreciation can create a net operating loss. Also there is no phase-out for the bonus depreciation.

You can use both Section 179 and bonus depreciation on the same asset, but must first use Section 179 and then use bonus on the remainder. For example; confinement building costing $1,000,000, the first year depreciation could be Section 179 of $500,000, bonus depreciation of $250,000 (50 percent of $1,000,000 – $500,000) plus $18,750 (7.5 percent x remaining $250,000) of MACRS depreciation. On the Federal income tax return the total depreciation would be $768,750.

What if you had purchased assets in 2014, but not knowing if and when Section 179 and bonus depreciation would be extended you had deferred some of your grain income to 2015 to keep your taxable income down for 2014? If you are a cash basis taxpayer and have deferred payment contracts, you can pull some or all of those contracts back into 2014 and declare the income for 2014 instead of 2015. It has to be a full contract, you can’t pull back part of the income on a contract.

At this time, we don’t know if Section 179 and/or bonus depreciation will be extended again for 2015, so if you have the capital purchases in 2014 to use the Section 179 and/or bonus, you may want to raise your income in 2014 to take advantage of the accelerated methods of depreciation.

Another option that can be applied after the end of the year is whether or not to expense fertilizer and lime costs or amortize them over a period of years. Expensing them at the time of purchase would decrease taxable income and amortizing them over a period of years would increase taxable income for 2014.

As always, visit with you tax preparer to see what your options are, even though 2014 has ended there are certain tax planning strategies that can still be applied.

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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.

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Funeral and Burial Plans: Iowa Law Provides Who Gets to Decide

MelissaORourke2-Nov2011Contributed by: Melissa O’Rourke, ISU Extension Farm & Agribusiness Management Specialist, morourke@iastate.edu   712-737-4230

Estate of Mary Florence Whalen: Can a surviving spouse over-ride the written wishes of his deceased wife for funeral and burial plans?

Iowa State University Extension and Outreach provides educational programming related to estate planning – and the subject of substitute decision-making and end-of-life planning frequently arises.  For this reason, a recent decision of the Iowa Supreme Court is worth review.

In 2008, the Iowa Legislature passed into law the Iowa Final Disposition Act which can be found in Chapter 144C of the Iowa Code.  The legislature’s enactment of this law followed some earlier court cases where survivors were fighting about where and how their deceased relative would be buried.  The Iowa Final Disposition Act is a comprehensive set of rules that outlines who can make these decisions.  This is the law that the Iowa Supreme Court applied in the recent case of the Estate of Mary Florence (“Flo”) Whalen.

FACTS:

Flo and her husband Michael Whalen were native Iowans, but they moved to Billings, Montana in 1953 where they raised ten children.  In 1996, Michael moved back to Anamosa, Iowa and Flo remained in Billings until 2004 when she moved to New Mexico to live near an adult daughter.  Flo and Michael never legally separated or divorced.  In December 2011, Flo traveled to Iowa for a visit, and became so ill that she could not travel.  Flo moved in with Michael and stayed there until her death on June 9, 2012.

Flo had devoted significant thought and planning related to the end of her life and where she wished to be buried.  While living in New Mexico, Flo executed a 2009 will that included a specific provision directing her burial in a cemetery in Billings where she had purchased a lot.  Two months before her death, Flo wrote a detailed letter that was sent to all ten of her children, her sister, and to her husband Michael, again specifically outlining Flo’s desires for a funeral and burial in Montana.

In her will, Flo named her sister Mary Ann as her executor (personal representative).  Prior to Flo’s death, and at Flo’s direction, Mary Ann consulted with a local funeral director in Anamosa regarding Flo’s wishes to be buried in Montana.  The funeral director told Mary Ann that Flo’s surviving spouse Michael would have the final authority regarding the final disposition of Flo’s remains, and that there was nothing that Flo could do about it.  The funeral director later told Flo the same (wrong) information.

When Flo died, the fight over what to do with Flo’s remains followed.  Mary Ann wanted to have Flo’s remains sent to Montana in accordance with Flo’s wishes.  Flo’s surviving husband Michael wanted Flo buried in Anamosa, Iowa.  The funeral home agreed to keep Flo’s remains stored at the funeral home pending a court order.  The decision of the Iowa Supreme Court was issued on February 22, 2013.

The district probate court in Iowa County ruled against Michael and ordered that Flo’s remains should be transported to Montana.  However, Michael appealed to the Iowa Supreme Court and was ultimately successful.  The Iowa Supreme Court agreed that the Iowa Final Disposition Act gives the surviving spouse authority to make final disposition decisions – unless the surviving spouse has followed the correct procedures to give that authority to someone else.

IOWA FINAL DISPOSTION ACT:

The Iowa Supreme Court carefully applied the specific provisions of the Iowa Final Disposition Act – Chapter 144C of the Iowa Code.  What does this Act provide?

Contrary to what the local funeral director told Flo, there was something more that Flo could have done to assure that her wishes were carried out.  The Final Disposition Act specifically provides that any competent person can execute a declaration that designates or appoints a person as “my designee” to have “sole responsibility for making decisions concerning the final disposition of my remains” as well as funeral plans, if any.  A specific form is included in the Act at Section 144C.6(1).  The Act then goes on to say that this form must be “contained in or attached to a durable power of attorney for health care under chapter 144B” and describes the specific procedure that must be followed for the declaration to be effective.

If a person does not execute a durable power of attorney for health care which either contains or has attached to it the final disposition directive as outlined above, the Act then provides a list of which survivors are granted authority under the law to make those final disposition decisions and plans.  Without going through the entire list, suffice it to say that the first person on the list is a surviving spouse; followed by surviving child(ren), parent(s), grandchild(ren), and then other more distant relatives.

In Flo Whalen’s case, she died as a resident of Iowa in 2012.  Therefore, Iowa law determined the outcome of the case.  Because Flo did not execute a directive pursuant to Iowa Code chapter 144C, her surviving spouse had the authority to decide where and how she would be buried.  It did not matter what Flo said in her will, or how many letters she wrote to her children or others – if she did not follow the law as found in the Iowa Code, her wishes would not be carried out.

CONCLUSIONS:

What can be learned from the case of Flo Whalen?

First, seek legal advice from a lawyer.  The funeral director is not a lawyer and did not know the law.  Prior to her death, Flo and her family members could have consulted with an Iowa attorney regarding their concerns.  Instead, they talked to a funeral director who wrongly informed Flo and her family that there was nothing Flo could do to give the authority to make final disposition decisions to anyone other than her surviving spouse.  Person with questions about the law should make an appointment to see an attorney and ask for complete legal information regarding such concerns.

Second, any person over the age of 18 should have powers of attorney in place.  Powers of attorney are substitute-decision-making tools – these documents appoint another person to make decisions about personal business or health care in the event of incompetency.  Without these tools in place, expensive court procedures are necessary to appoint guardians or conservators.  Any Iowa attorney can assist in executing powers of attorney – it is a simple and inexpensive process.

Finally, if you do not have a complete estate plan in place – no matter the size of your estate or assets – seek out legal advice and complete that process.  To find an attorney, consider the guidelines found in this publication:  Estate Planning Attorneys: Finding One Who Can Work For You on the Ag Decision Maker website at this link:  www.extension.iastate.edu/agdm/wholefarm/html/c4-61.html

Consider attending an estate planning workshop offered by your local ISU Extension office – call to find out when one may be offered in your area, or go to Ag Decision Maker for more information:

www.extension.iastate.edu/agdm/info/meetings.html

As always, each reader should contact their own attorney to obtain legal advice based on their own situation.

Note: Iowa State University Extension & Outreach does not provide legal advice.  Any information provided is intended to be educational and is not intended to substitute for legal advice from a competent professional retained by an individual or organization for that purpose.

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An agricultural economics and business website.

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