Farm Income Tax Management
Chapter 16---Key Questions
„ What
types of income are taxable?
„ What are the differences between
income tax and self-employment tax?
„ What strategies can be used to
maximize after-tax income?
Types of Taxable Farm Income
„
Ordinary farm income (Schedule F)
‹ Federal income tax
‹ State income tax
‹ Self-employment tax
„
Capital gains income
‹ Capital gains tax (lower rates)
IRS Schedule F
Gross Farm Income
- Farm Expenses (incl. depreciation)
= Net Farm Profit
Can use cash or accrual.
Most use cash.
Self-employment Tax
„ Up
to $106,800 taxed at
12.4% for Social Security
„ All of it is taxed at another
2.9% for Medicare
Ordinary Income
Deductions
Standard deduction
‹ $5,700 for single person
‹ $11,400 for married couple
„ Can itemize deductions instead
„ Personal exemption of $3,650 / dependent
„ Family of one has $9,350 tax free income
„ Family of 4 has $26,000 tax free income
„ Remainder is Taxable Income
„
Income Tax Rates
Federal (married, joint)
Taxable Income
Marginal Rate
10%
„ $0 to 16,700
15%
„ $16,700 - $67,900
25%
„ $67,900 – 137,050
28%
„ $137,050 - $208,850
33%
„ $208,850 - $372,950
35%
„ Over $72,950
Iowa Income Tax Rates
Increases gradually from .36 %
up to 10% at $63,316.
Marginal Tax Rate
Total tax paid on the last $ of income
Example: taxable income = $80,000
Federal rate =
25%
Iowa rate =
10%
Self-employment = 15.3%
Total marginal rate =48.3%
Example: Federal Income Tax
Net income = $89,350
„ Taxable income = 89,350 – 9,350 = $80,000
= $1,670
„ 1st $16,700 taxed @ 10%
„ 2nd $67,900 – 16,700
= $51,200 @ 15%
= $7,680
„ 3rd $80,000 -$67,900
= $12,100 @ 25%
= $3,025
$12,375
„ Total income tax owed =
„
Tax Credits
„ Credits
are subtracted from the
amount of tax owed.
„ $1,000 credit for each child under 18
„ Educational expenses
„ Energy saving investments
„ Foreign taxes paid
Capital Gains Income
„ When
capital assets are sold for more
than original tax basis
„ Taxed at 5% or 15%
„ Not subject to self-employment taxes
„ Breeding livestock
‹ raised animals have zero basis,
so all sales are capital gains
Federal Income Tax Return
Farm income + wages, etc.
- deductions and exemptions
= taxable income
x tax rates
= ordinary income tax
+ self employment tax
+ capital gains tax
- tax credits - withholding
= total taxes owed
Tax Management Strategies
1. Level out income from year to year, avoid high
„
marginal tax brackets
Example: Taxable Income
‹ year 1:
$ 90,000
‹ year 2:
$ 10,000
‹
„
Level income:
‹ year 1
$ 50,000
‹ year 2
$ 50,000
‹
„
Saving
Fed Income Tax
$16,000
$ 1,000
$17,000
$ 6,800
$ 6,800
$13,600
$ 3,400
2. Defer income into future tax
years, earn interest on tax $
$40,000 x 25% tax rate = $10,000
10,000 x 8% interest rate = $800
Use cash accounting to:
‹ Delay income
‹ Move up expenses
„ Use fast depreciation rates
ƒ
Tax Management Strategies
3. Report enough income to use up
personal deductions and credits
4. Qualify income as capital gains
when possible
5.Use net operating losses (NOL) to
offset past taxes
6. Use income averaging (back 3 yrs)
Goal of Tax Management
Maximize long-run income
after taxes, not minimize
taxes.
40%
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Marginal Tax Rates (last $)
Marginal Tax Rate
50%
45%
Federal
Self-empl.
Iowa
35%
30%
25%
20%
15%
10%
5%
0%
Gross Income
Total Tax Rate
Total Tax Rate
Federal, Iowa, SE
35%
29% 30%
30%
26%
25%
20%
32% 32% 33%
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23% 23%
17% 17%
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