5 Year-End Tax Planning Tips
As we approach year-end and harvest has passed for most farmers, we turn to how we minimize the income tax impact from our farm operations. Many farmers want to eliminate income taxes, but rather, we strive to optimize the amount paid each year. We like to report enough income to soak up the top of certain tax brackets. For example, the top of the 12% tax bracket for a married couple is about $90,000 of taxable income. This is about the lowest tax rate we will see over the next several years.
Here are five key year-end tax planning opportunities to consider, but don’t forget to meet with your tax adviser to pin down what works for you.
1. Estimated Tax Payments
An option only available to farmers is to file and pay income taxes by March 1, or simply pay one estimated tax payment on Jan. 15. Many farmers prefer to use the March 1 option, however, it’s usually better to pay the Jan. 15 estimate and then take care of the remaining amount on April 15 – especially with higher interest rates. The required payment is the lesser of either 100% of the previous year’s tax or two-thirds of this year’s tax.
Example: Assume last year’s tax was $10,000 and you will owe $100,000 this year. You either pay the $100,000 on March 1 or pay $10,000 on Jan. 15 and the remaining $90,000 on April 15. Assuming 8% interest, the savings on the $90,000 deferred from March 1 to April 15 is $907.
2. Deferred Payment Contracts
A favorite year-end tax planning tool is to sell grain on a deferred payment contract. This allows the farmer to lock in their price but defer getting cash until after year-end. A unique benefit of these contracts is we can elect to bring that income into this year’s tax return if we need to increase taxable income. However, this must be on a contract-by-contract basis so make sure to have some smaller and mid-size contracts instead of one large contract.
Example: Assume you sell 50,000 bu. for $250,000. You can either defer it using one contract or use five contracts. When working up the tax return, we find we need an extra $50,000. If we have five contracts, it is easy for us to bring the needed income, whereas the one large contract would result in an extra $200,000 of income.
3. Deferring Crop Insurance Proceeds
Most farmers can elect to defer crop insurance, but only the portion related to yield loss. The price portion can’t be deferred. Crop insurance companies will calculate these two amounts, but we can estimate it by calculating the loss based on electing yield insurance only. The difference between revenue protection and yield would be your price portion that can’t be deferred.
Example: Assume you have 200 bushels APH and elect 85% coverage. Your final yield is 160 bushels, and you collect $100 per acre of proceeds. Ten loss bushels multiplied by $5.91 equals $59.10 of yield loss that can be deferred. The remainder can’t be deferred.
4. Paying Your Kids
We typically see farmers either “forget” to pay wages for their kids who complete work on the farm, or they don’t pay enough wages. If the child is under age 18, there are no payroll taxes on the wages. If they are older, simply paying them with grain will yield the same result. If the child is going to college and needs $25,000 for tuition and costs, then we can really bump up the savings. For 2023, the child can earn an almost $14,000 tax return. If we have gifted them $13,000 of grain that they hold at least a year, the profit from selling it is tax-free because the “Kiddie Tax” won’t apply to them due to the wages being more than half their support. The parents reduce their income by $27,000 and the child pays no taxes.
5. Electing to Capitalize Repairs or Fertilizer
Another option that is available to increase income if needed is to elect to capitalize repairs or fertilizer. This allows us to optimize taxable income.
