Times are tough in the farm sector. One of the few benefits to tough times is farmers will likely owe little or no tax. But that is not always the best solution for a farm couple. With some key tax planning, many farmers with young children might be able to turn no refund into $7,800 or more.
When a farmer shows negative taxable income, there is usually no tax refund. This also prevents the farmer from paying into Social Security or setting aside anything for retirement.
With some planning, we can create refunds of up to $7,800 or more. Let’s see how it might work.
From Loss to Refund
Ed and Mary farm in Illinois and have two young children. Mary stays home to help on the farm. Ed expects to show a loss during 2019 of about $20,000 resulting in no tax refund.
Our first option is to elect optional self-employment. Under this election he can elect to pay in the equivalent of four quarters of self-employment tax of about $832 (Note: We are using 2018 numbers for these examples).
However, Ed and Mary now qualify for an earned income tax credit of $2,190 for a net refund of $1,358. Because Mary helps on the farm, Ed could pay her a cash salary of $9,500. This costs $1,454 of payroll taxes but boosts the earned income tax credit to $5,828 for a net refund of $3,542.
Finally, instead of paying cash wages, Ed could elect to pay a commodity wage to Mary. This would result in no payroll taxes being owed and a final refund of $4,996.
Ed can also use these elections to reduce his loss and increase his refund:
- By electing the optional self-employment method, he will now qualify for a partial refundable child tax credit of $446. This will increase the refund to $1,804.
- He can pay $16,000 of cash wages to Mary. This will cost $2,448 of payroll taxes, but boost the refundable child tax credit to $2,800 (the limit for two kids).
- If he pays a commodity wage to Mary of $16,000, this now eliminates the payroll taxes and boosts the final refund to $7,796.
Remember, just because you are in a loss, does not mean you can’t be creative and get some tax refunds.
This requires very little work on your part, but make sure to meet with your tax adviser to structure it properly. Many farmers would appreciate an extra $7,800 this year.
Listen to Paul share more tax planning advice on this episode of the Farming the Countryside podcast:
Read more analysis and frequent insights to tax questions on Paul’s blog at AgWeb.com/farm-cpa
Paul Neiffer is a tax principal with CliftonLarsonAllen and author of the blog, The Farm CPA.
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