Heads up—this is the year to take advantage of a couple soon-to-expire tax opportunities while striking a balance with your tax liability so you don’t crimp your financial situation. "Lower grain prices might mean some producers will have to dip into their working capital to make ends meet in 2014," says Darrell Dunteman, Farm Journal tax columnist. As you close the books on another year, Dunteman offers these reminders:
Section 179. This is likely the one and only remaining year to take advantage of the Section 179 deduction limit of $500,000. In 2014, the deduction limit is slated to drop to $25,000 with an adjustment for inflation. For 2013, you can still deduct 50% of the purchase price of new qualified assets (a life of 20 years or less). The 50% bonus depreciation will probably not be available next year.
You want to take the maximum amount of depreciation available in 2013 because if you use normal depreciation methods, a tractor, for example, will be depreciated over a seven-year period. Do you know what tax bracket you’ll experience in 2015?
Taxable income target. Every operation should have a taxable income target, which is based on tillable acres and yield, as well as other enterprise income such as livestock, trucking, custom farming, etc. Your goal is to hit the optimum taxable income each year so that you don’t pay 15% one year and then jump to the 33% bracket the next when you should be in the 25% bracket both years.
Any new farm bill will likely eliminate direct payments. With that in mind, defer the higher incomes of 2013 to 2014. Prepay expenses to hit your target income this year. Loss of funds to income tax is the poorest expenditure you can make, Dunteman says.
Self-employment tax. Most farmers pay more self-employment tax than income tax. Once you hit the maximum self-employment tax income ($113,700 for 2013), you only pay the Medicare portion of self-employment tax (currently 2.9%). While you can carry back or forward a net operating loss for income tax purposes, if you carry back a loss, it does not apply to self-employment tax calculations.
Medicare premiums. A couple years ago, the Internal Revenue Service announced that all Medicare premiums are insurance constituting medical care and can be deductible as self-employed health insurance for qualifying active farmers. Taxpayers are eligible to file an amended return for all open years (2010, 2011 and 2012) to benefit from this deduction.
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This is one of the 14 Drivers for Success in 2014. Read the full list from Farm Journal's December issue.