Hold up, there. Before you start spending money at year’s end to reduce taxes, realize that it might not be the best move. Some tax experts are actually advising farmers to boost their income for 2012 because tax rates are set for a hefty increase next year in addition to tax credits tumbling.
The maximum income tax rate of 35% is scheduled to increase to 39.6% in 2013. Additional tax hikes include a 0.9% Medicare surtax and a boost in the capital gains rate to help fund the health care law. There’s a chance that Congress will take action to prevent tax hikes between now and early 2013, but it’s important to have a game plan either way.
Don’t be overly eager to use up all the deductions that can be used in future years, particularly 2013, says Brad Palen, a CPA and partner with Kennedy and Coe in Salina, Kan.
This is particularly true because strong farm income is again expected next year. Pushing too much income into 2013 could hurt your bottom line if you look at 2012 and 2013 together, Palen says. Every farm tax case is different, he cautions, and what is a good strategy for one producer is not always good for another.
Deferred payments. "Flexibility is particularly important this year, not knowing whether Congress will pass anything that reduces rates for 2013," Palen says.
One key way to remain flexible is through deferred payment contracts. For example, producers can sell and deliver grain this year but receive the payment in 2013. When filing the 2012 return next year, they can decide whether to claim the income in 2012 or 2013. By then, Congress should have made up its mind on tax credits and rates. (When using deferred payment contracts, remember that if the firm goes belly-up, you’re out your money, Palen notes.)
Crop insurance payments. How do crop insurance payments received in 2012 fit into the equation? "If you are in the habit of selling at least 50% of your grain the year following when it’s produced, you can roll the crop insurance income into 2013," says Darrell Dunteman of Bonnett and Dunteman LLC Certified Public Accountants and Consultants in Bushnell, Ill. Farmers cannot roll the revenue portion forward, however, only the crop yield loss.
Income averaging. One tool Dunteman uses with farm clients who have an income boost is income averaging. This is not available for Social Security tax obligations, however.
- December 2012