A reader asked the following question as a follow-up to our post about gifts:
"Please touch on one more aspect of gifting: gifting grain and the tax owed by the recipient. Thanks, I enjoy your emails."
Cash method farmers have many situations where gifts of farm commodities to family members could be advantageous:
- Moving income to minor children in a lower tax bracket;
- Helping with college costs for children of the taxpayer;
- Supporting parents of the farmers.
The expansion of the kiddie tax in 2008 to dependents up to age 23 (attending college) reduced the advantage of making gifts of farm commodities to relatives, but not completely. The farmer still removes this income from his schedule F and, if self-employed, neither the farmer or child will pay self-employment taxes on the gift.
One thing to remember is to gift farm commodities that were raised in the prior year, since there will be no reduction in operating costs related to the commodity gifted. (If gifted in the year of production, you have to reduce your operating costs by the amount attributable to the gift.)
If the family member is not a dependent under age 24 (going to college), the income tax effect for them is very straightforward. The basis in the commodity carries over, most likely zero (unless gifted in the year of production). The grain is considered a capital asset in the hands of the donee and, if sold in less than a year, is subject to ordinary income tax rates. If held more than a year, it is subject to favorable capital gains rates. In the case of parents that the farmer is supporting, they may have only Social Security income and could easily earn another $10,000 to $20,000 of gifted farm commodity income and pay no tax; if held for more than a year, they could easily double or triple that amount in certain situations for 2011 and 2012.
For a dependent child, it is likely that the kiddie tax will apply and the child will pay income taxes on the sale of the grain based upon the farmer's tax rate. Therefore, there is minimal income tax savings, but there can be substantial self-employment tax savings.
One last reminder: Make sure to document the gift properly and that the person receiving the commodity has actual control and ownership before selling the commodity. Review this with your tax adviser to make sure it is done properly.