While you’re wrapping up harvest and thinking about the holidays ahead, there’s one more thing to add to your “to do” list this holiday season: year-end tax planning. Here are eight tax tips to help reduce your anxiety and possibly lower your tax bill.
Consider converting from a regular IRA to a Roth IRA
Before 2010, you could convert your traditional IRA to a Roth IRA only if your adjusted gross income was less than $100,000. For many farmers, this meant they could not take advantage of converting to a Roth IRA.
For 2010, however, you can convert your regular IRA to a Roth IRA without worrying about the $100,000 adjusted gross income limitation. Another nice feature for this year only is that the income from converting to the Roth is reported over two years, beginning in 2011. This means that if you convert $100,000 in 2010, you report zero income in 2010 and $50,000 each in 2011 and 2012.
You can also decide to undo the conversion by the due date of your tax return for 2010, which means that with an extension you have until Oct. 15, 2011, to decide if you really want to do the conversion or not.
Review your expenses for proper credits
Along with new credits added this year that may apply to farmers (see below), there’s an old one that you may have forgotten about.
There is a credit for those expenses related to agricultural chemical security enhancements. Any expenses incurred to properly store and use agricultural chemicals qualify for a 30% credit on your tax return. These expenses include security, computers and other related soft costs. This credit is usually claimed by the manufacturer or distributor of the farm chemicals. However, in many cases, the farmer can qualify for the credit. If you have spent or plan on spending money on enhancing the security of your farm chemicals, make sure to claim this credit as appropriate. As with most credits, you will need to add the credit back to arrive at farm income.
New small business tax credits can help farmers
If you employ 10 or fewer employees and they earn on average less than $25,000 per year, you are allowed to claim a credit of 30% of the total health insurance premiums paid for your employees.
Farmers who hired unemployed workers after Feb. 3, 2010, and before Jan.1, 2011, can claim two credits:
• For payroll taxes paid after March 18, 2010, and before Jan. 1, 2011, farmers get a credit for the 6.2% FICA tax that they would normally pay on the employee’s wages.
• If the employee is still working for the farmer at the end of the year, the farmer qualifies for a $1,000 credit when filing a tax return.
Prepay fertilizer, spray and other input costs
You can prepay for qualified farm expenses such as fertilizer, oil, diesel, seed, etc., at year-end. As long as the expense is a normal farm expense and has a business purpose, such as locking in a price discount, the deduction will be allowed. However, these types of expenses should be less than 50% of your overall farm expenses and you should always review these items with a tax professional.
Take advantage of personal credits
If you make energy-efficient improvements to your home, those costs will qualify for a 30% credit, up to a maximum credit of $1,500. This credit reduces your tax bill dollar for dollar. If you are interested in buying a hybrid vehicle, it qualifies for a tax credit that will expire in 2010. Only certain vehicles qualify, so check on www.fueleconomy.gov. Certain clean-burning vehicles may qualify as well.
Accelerating or deferring income
Conventional wisdom suggests that deferring income into future years yields a higher tax benefit. However, given the possible rise in tax rates for 2011, you may want to consider accelerating income into 2010 to take advantage of the lower rates for 2010. Since the tax law may change after year-end, this planning opportunity may not be fully known by year-end.
Consider taking long-term gains
If the Bush tax cuts expire, capital gains will rise in 2011. You should review assets that you have long-term gains in and consider taking gains now. If your income is low, consider selling enough of the asset to soak up your 15% tax bracket. Long-term gains in this bracket are taxed at zero. So, for example, if your net taxable income after deductions is zero, take the long-term capital gains of about $68,000 and have it tax-free, assuming you are married.
Maximize equipment purchases to minimize your taxes
If you are making large equipment purchases this year and next (for nontax reasons), make sure you take advantage of the favorable Section 179 deduction limits. For 2010 and 2011, this limit has been expanded to $500,000 for each year. If you will be buying about $1 million of equipment, split it equally between 2010 and 2011.
The Section 179 deduction limits for equipment have been increased to $500,000 for 2010 and 2011.
Books on Farm Taxes
A reader of my online blog, The Farm CPA, asked me which books I would recommend regarding farm taxes. I have researched this and found a couple of short booklets on the subject that I think can help farmers. You do need to make sure that these resources are updated each year, since the tax law does change and, lately, it changes rapidly. A few books that I find helpful are:
- University of Minnesota Extension’s “Ag Income Tax Update for Farm Families.” This gives a good overview of farm taxation, including some data specific to Minnesota.
- North Dakota Extension Service’s guide on tax records retention, “What to Keep Where and for How Long.”
- Washington State University’s “Federal Income Tax Manage-ment for Farmers and Ranchers” guide from October 1995. Although this is outdated in some respects, it lays out some very good income tax planning principles that are still useful.
- A slightly outdated but useful manual is Purdue University’s “Income Tax Management for Farmers in 2008.”
- Finally, the old standby is Publication 225 from the Internal Revenue Service: “Farmer’s Tax Guide.” This is a comprehensive outline of farm taxation from the standpoint of the IRS. It does a great job of explaining the tax law, but you will not find any tax planning strategies.
As with any tax planning decision, always consult a professional tax adviser before taking any major steps.
Paul Neiffer is a Certified Public Accountant with Hansen NvO who has worked with farmers and farm taxes for more than 30 years. He is author of the blog The Farm CPA on AgWeb.com.
Top Producer, Mid-November 2010