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October 2012 Archive for The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Fiscal Cliff Example #2

Oct 30, 2012

We had several readers respond to our post yesterday asking for a couple more examples for a more "typical" situation.  The seminar included other examples.  One example was a married couple with three children and "normal" itemized deductions with the husband earning $100,000.

In this example, the gross income tax owed for 2011 was $7,779.  After a $3,000 child tax credit and a $1,500 education credit, the final tax amount was $3,279.  For 2012, the tax is currently scheduled to increase to $4,860 unless they extend the AMT "Patch" increased exemption amount.  If this is extended (which should happen, but may not), the actual tax owed would be $3,184. 

In 2013, the total tax bill would be $5,860 or an increase of almost $2,600 from 2011 or a 79% increase.  In addition, their families FICA tax would increase by $2,000.  Although a much smaller number than the example yesterday, this is a much higher percentage increase in tax.

The primary reason for the large increase is the child credit is reduced from $1,000 per child to only $500 per child.

Another example with a husband earning $100,000 and the wife earning $50,000 with a long-term capital gain resulted in their total tax bill going from $26,625 in 2011 to $34,375 or an increase of $7,750 or about 29%.

For most taxpayers, even if Congress does extend the Bush and Obama tax cuts for another year, if the AMT "Patch" is not enacted, most taxpayers would see little or no benefit from the extension.  The AMT number becomes larger and larger each.

What Will the Fiscal Cliff Mean to You?

Oct 29, 2012

As part of our normal tax planning updates at our firm, we had a two hour presentation on how the Fiscal Cliff may affect some of our taxpayers.  As many of you know by now, on January 1, 2013 the Bush and Obama related lower tax rates are scheduled to expire along with many other programs designed to save taxes.  Additionally, alternative minimum tax (AMT) relief for this year is still not in effect which may subject many millions of taxpayers to the AMT for the first time.

One of the slides that was presented showed the effects of this "Fiscal Cliff" on a sample taxpayer.  This taxpayer had wages of $400,000, interest income for $100,000, qualified dividends of $100,000 and long-term capital gains of $100,000.

Under 2012 tax laws, their federal income tax liability would have been $190,000.  With the new 2o13 laws (unless changed), their income tax increases by $60,000 to $250,000.  This is a roughly a 31.5% tax increase.

The primary increases relate to the increase of the tax rates and related compression of the tax brackets and the taxing of qualified dividends at ordinary tax rates.  Here is a recap of the relevant changes:

  • Employee FICA on wages (reflects expiration of 2% payroll tax cut) - $2,200 increase
  • Tax on qualified dividends - $24,600 increase
  • Tax on long-term capital gains - $5,000 increase
  • Phase-out of personal exemptions - $1,500 increase
  • Compression of tax brackets/increase in rates - $13,500
  • 3.8% Medicare surtax on passive income - $11,400 increase
  • 0.9% Medicare tax - $1,800 increase

All of these increases add up to the overall increase of $60,000.  Also, the taxpayer had itemized deductions, another tax increase of around $4,000 would probably have resulted.

We will have many of our taxpayers in similar situations and this is what they will face in 2013 in changes are not made.  With some planning, we can minimize some of these tax increases, but many may be beyond our control. 

What will it mean to your taxes?

Read More: Fiscal Cliff Example #2

Updated 2013 Inflation Adjusted Estate and Gift Amounts

Oct 28, 2012

The IRS recently released Revenue Procedure 2012-41 that outlined all of the inflation adjusted items contained in the tax laws.

There were a couple of provisions related to gift and estate taxes that apply to farmers.

Beginning in 2013, you can now give up to $14,000 any individual(s) during the year and not have to report this on form 709. If you give more than this amount, you are required to file a return, however, in most cases, this gift will still be free from gift taxes. You could give $13,000 in 2012. Although this amount is adjusted for inflation, it does not change until the amount increases by more than $1,000. Therefore, the next increase will be to $15,000 and this will probably take three or more years assuming current inflation rates.

Another estate tax adjustment is in regards to special use valuation. This relates to how much you can reduce your estate value for farmland (or other business real estate). For most farmers that own a fair amount of farmland may qualify for this valuation method. However, as discussed in previous posts, there are many requirements that must be met and you may decide not to use it.

For 2012, the maximum amount you could reduce your estate by was $1,040,000 up from $1,020,000 in 2011. For 2013, this amount has increased to $1,070,000.

With the schedule reduction in the lifetime exclusion to $1 million beginning in 2013 (assuming Congress does not change it), the use of this special method to value farm property may increase dramatically.

2013 Social Security Changes

Oct 16, 2012

The Social Security Administration just announced the 2013 changes for items related to inflation adjustments.

The Cost-of-Living Adjustment for 2013 will be 1.7%.  This means that social security recipients will receive a 1.7% raise beginning in January.

The wage base that is subject to FICA taxes will increase from $110,100 to $113,700.  Therefore, the maximum amount of FICA tax will be $7,049.40 for the employee and employer or $14,098.80 combined.

A quarter of coverage will be based upon $1,160 of earnings.

People who retire at less than full retirement age will be allowed to earn $15,120 per year ($1,260 per month) up from $14,640 in 2012.  $1 is withheld for every $2 in earnings above the limit.

In the year of attaining full retirement, the amount increases to $3,340 per month for each month before retirement age that they can earn.  Once they reach full retirement, they can have unlimited earnings without penalty.

Remember that the Medicare surtax on earnings in excess of $200/$250,000 per year will apply beginning January 1, 2013.  Therefore, the Medicare tax on earnings in excess of those amounts will be 3.8% (split 50/50 between employee and employer).

Another Tax Season Bites The Dust

Oct 15, 2012

For most farmers, their tax season usually ends on March 1 of each tax year since that is when they usually file their income tax returns.  However, for the rest of us, our normal due date is April 15, but many of our clients get an extension until October 15.

These clients are usually our "procrastinators" and it can get very stressful to get these returns all down by October 15 of each year.  As usual, I still have a few stragglers that for some reason cannot find all of their information or get it to me.  I will deal with those after today but for 99.9% of my clients, we are done with another tax season.

Now it is time for us to do our year-end tax planning and if you have never done this before, contact your tax advisor since planning now can save you taxes later!

Where Will Harvest Prices End Up for Crop Insurance?

Oct 11, 2012

The USDA report that came out this morning appeared to have a bullish bias to it. Corn and beans were up at least 20¢ and wheat was not too far behind.

As of today, the average corn price for the month of October for the harvest crop pricing is $7.50, based on my unscientific averaging of the highs and lows for corn prices each day this month. Bean prices are slightly lower than $15.50. These prices are about $2 and $3 per bushel higher than the initial spring price.

I believe that corn prices should hold close to the average and bean prices may trend down a little bit, but the current average prices should not be too far off.

For those who are interested, please e-mail me your guess on the final average corn and bean price for the full month of October.

I will guess that corn will end up at $7.55 and beans will end up at $15.30. Let's find out who can be the closest. Please let me know in your e-mail if you want me to share your name if you end up winning. I hope to get more than one entry.

Is the U.S. Deficit Really $76 Trillion instead of $16 Trillion?

Oct 11, 2012

Bill Gross is the lead investment manager for PIMCO which is probably the largest Bond Fund company is the US or the world.  Every month, he writes an Investment Outlook letter to their investors and this month's letter was entitled "Damages". 

In the letter, he recaps the countries whose deficit is large as a percentage of their GDP and those who are small.  It is probably not surprising that Greece, Japan, Spain have large deficits, however, the US deficit as a percent of GDP is actually larger than any of the countries other than Japan.

The lesser developed countries such as China, Russia, etc. are much lower and those countries such as Germany and Canada who have gotten their fiscal house in order are much lower too.

The final couple of paragraphs deal with the current total US deficit of $16 Trillion, however, if you add the present value of all of the benefits owed due to Social Security, the deficit becomes closer to $76 Trillion.  Now payroll taxes will cover much of that, but it is interesting to see that the US may not be much better than the PIGS (Portugal, Italy, Greece and Spain) countries.

Will Farmers Have More "Repairs" This Year?

Oct 09, 2012

Until about two years ago, farmers could have been in a battle with the IRS concerning whether a repair was really a repair or an asset that needed to be depreciated.  Beginning in late 2010 and through 2011, 100% bonus depreciation applied for any new purchase including what might have been classified as a repair by the farmer and an asset by the IRS.  This led to most farmers not caring if a repair was a repair or not since in either case it was fully deductible.

Now, for 2012, we only have 50% bonus depreciation and Section 179 is limited to $139,000, so I would expect there to be a lot more repairs by farmers.  Some of the repair rules have been loosened up and if you think you might need more "repairs" this year, make sure to review this with your tax advisor to make sure the repair is really a repair, otherwise the IRS may surprise you later on and classify it as an asset depreciable over 7 years or more.  That can be costly.

This is also another area where proper documentation can be helpful.  By documenting what was repaired and why, etc. you are more likely to withstand an IRS audit  than having the wrong or no documentation.

Maintain Flexibility with Deferred Payment Contracts

Oct 08, 2012

One of the best tools in our farm tax toolbox is the ability to use deferred payment contracts to achieve our desired level of taxable farm income.  These contracts call for the sale of grain in 2012, with payment being received in 2013.  Normally, the sale of the grain is taxed when cash is received, however, the tax laws allow farmers to elect out of the installment method on any of the contracts and accelerate this income into 2012.

With the uncertainty of the current income tax situation (will the Bush Tax Cuts be extended, will Section 179 be increased retroactively, will bonus depreciation be retained for 2013, etc.) these contracts provide maximum flexibility to the farmer for 2012/13.  To maximize this flexibility, we stronger recommend that the farmer have at least two or three contracts that are smaller than normal to allow for picking and choosing the correct contract.  The election is on a contract by contract basis, you cannot pick and choose a dollar amount.

As an example, assume Farmer Jones has entered into three deferred payment contracts all at $7.50 per bushel:

  • Contract #1 5,000 bushels,
  • Contract #2 7,500 bushels,
  • Contract #3 10,000 bushels.

 

When preparing his tax return, he finds out that instead of having taxable farm income of $100,000 (his desired amount), he has a loss of $25,000.  To generate an additional income, he can elect out of the installment on contract #2 and #3 and increase his income by $131,250 to get him back to roughly his desired income.  Or he could pick #1 and #3 if he wanted to report a little less income.

If you consistently use deferred payment contracts, make sure to pick the right size for a couple of them each year.

Combining 265 Bushel Corn

Oct 04, 2012

We have had great late summer/early fall weather here in the Northwest.  Cool mornings with highs in the low to mid 80s for the last couple of weeks.  On Tuesday, I visited one my clients that was harvesting corn just north of Pasco, Washington.  They had just finished up a 50 acre field that had done about 290 bushels per acre and were harvesting a field that according to the combine monitor was in the 265 acre range.

This corn had about 23% moisture and is hauled to a local feedlot that then stores it for winter feeding.  I rode with my client to the feedlot about 25 miles away.  I took several pictures which I will upload once I find a cord that will allow me to plug the camera into the computer.  Those cords are always to easy to lose.

It is great to watch 265 bushel corn being harvested.  You spend almost as much time dumping the grain out of the bin than not.  Using a fairly new John Deere 9870 kept two grain carts and four semi trucks busy all day and that is with only a 8 row corn head.  They have ordered a new 12 row corn head but I think John Deere's moto of "Just In Time" production stands for just in time for the end of harvest.

 

Will the Fiscal Cliff Really Cause Drastic Cuts in Spending?

Oct 01, 2012

It seems every time I turn the TV to a national news channel, someone is talking about how drastic the spending cuts will be if the fiscal cliff goes into effect on Jan. 1, 2013.  I have always wondered what that reduction in spending would be, and I ran across a study from the Congressional Research Service (CRS) on the economic effect of these cuts and tax increases.

For FY2013, CRS estimates the total reduction in the deficit would be $607 billion. In broad strokes, this comprises total tax increases of $399 billion, spending reductions of $102 billion and $105 billion in other changes not associated with policy changes. 

Of the $102 billion in spending cuts, only $65 billion is associated with automatic spending cuts. Most of the other cuts relate to reductions in unemployment insurance.

Since only $65 billion relates to direct spending cuts, eliminating the 2% reduction in the FICA rate will actually decrease the deficit by $95 billion, which is $30 billion more than the spending cuts.

It seems like the fiscal cliff is not very high from a spending-cut standpoint.

Individual tax increases are about $221 billion, and most people assume this is all due to the Bush tax cuts expiring.  This is incorrect.  Almost half of this, or $89 billion, relates to the assumption that the alternative minimum tax (AMT) patch will not be extended.  Congress has continued to extend the AMT patch each year for several years, but once this number hits almost $100 billion in a year, I am not sure how much longer that will continue.

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