Tis the season for figuring out the special gifts you want to bestow on your loved ones at Christmas. It’s also the time many farmers consider the financial gift they want to donate to favorite charities before the year ends. This December, consider giving a gift of grain, says Paul Neiffer, a tax accountant with CliftonLarsonAllen LLP and author of The Farm CPA on Farm Journal’s Agweb.com.
Under the former tax law, gifting charities with grain reduced your farm’s taxable income but wasn’t considered a charitable donation by the IRS. Under the new tax law, you might be able to achieve both.
Here’s a before-and-after tax law example for your consideration:
Under the old law, assume Mary and Bill—who don’t itemize their deductions—gave $10,000 of grain out of Bill’s Schedule F farm operation, and that he was under the wage base. The $10,000 of grain donated reduced the couple’s Schedule F income, which resulted in saving $1,530 of self-employment tax. Plus, since they were in a 25% tax bracket they saved about $2,500 of income tax. They also lived in Iowa and saved about $700 of state income tax. On top of it, they were still entitled to their standard deduction of $12,700. By making a $10,000 grain gift, they saved about $4,700 of combined self-employment and income taxes.
Now, for 2018, grain is an even better option for Mary and Bill to give. They still get approximately the same amount of tax savings, but their standard deduction will increase to $24,000. As a result, they will shelter close to an extra $10,000 of income (although they won’t get any exemption deduction).
Also, some states would allow the couple to contribute grain to a charity and then get a credit against their state income tax. Bill and Mary would not get any charitable deduction for the grain; however, this grain gift effectively reduces their state income taxes by the value of the gift.
“This means that in some states, they would be allowed to reduce their state income tax liability by up to the value of the grain gift, which could be as high as $10,000 [as in our example],” Neiffer says. “Gifting grain can be very powerful, and under the new tax law it can even make more sense.”
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