As the calendar year comes to a close, most operators have already made at least one trip to the accountant’s office. While nothing has been sorted out on tax reform, year-end tax basics are the same. Here are a few year-end tax tips Paul Neiffer, Top Producer columnist and principal at CliftonLarsenAllen.
1. Keep Accurate Records. This should go without saying, but your accountant can only work with the information you provide. If your records are incomplete, you could end up paying more taxes than necessary.
2. Pay Your Kids. “If you are a schedule F farmer with children under age 18, make sure to pay them what they really earned this year,” Neiffer advises. “Children with no other income can earn about $6,000 this year tax-free (some states may require a little bit of tax) and the wages paid are completely deductible and even better, no payroll taxes are owed.” He says the child can take those earnings and contribute to a Roth IRA account. If your child puts $5,000 into a Roth IRA at age 17 and lets it compound for 48 years until age 65, it will grow to about $80,000.
3. Be Generous. If you do not itemize and plan on giving money to your church or other charity at year-end, consider giving a commodity gift instead, Neiffer says. This will reduce taxable income and reduces your self-employment tax burden if you file a schedule F or are a partner. Similarly, consider gifting grain to your child. “You reduce your self-employment tax and if they hold the grain for at least a year after harvest will qualify for long-term capital gains treatment,” Neiffer explains. “If you make this gift, make sure to gift a prior year crop, not the current year crop
4. Sell Some Grain. Consider selling some grain on a deferred payment contract. “This gives you flexibility after year-end if you need to bring income into 2018,” Neiffer says.
5. Be Specific. If you plan to prepay expenses to reduce your tax liability, keep in mind they must be for a specific quantity of a specific product. Ask your input company give you an invoice reflecting what was actually purchased, he advises.
6. Plan Ahead. Determine if it makes sense to pay an estimated tax payment on January 15 and pay the remainder on April 15, 2018. That could be better for your cash flow than filing and paying your entire tax liability at once.
7. Don’t Move A Muscle. Tax reform is underway, but how long it will take is yet to be determined. One thing farmers do know is that the estate tax is on the chopping block. According to Neiffer this is not the time to make any significant changes to your estate plan. “It’s best to wait until this is all sorted out before making major changes,” he says. There is some concern about step up in basis being eliminated with the estate tax which would have major implications for farmers. “They actually could end up paying more without an estate tax,” he says. Most Washington Policy analysts expect tax reform to be close to wrapped up before the end of the year. The White House says tax reform is on their list of legislative priorities for completion in the fall.