End of year farm tax planning
Now is the time of year for farmers to do tax planning. Careful planning now can help lower the tax bill next year.
The basic tax management strategy is to avoid wide fluctuations in taxable income. Relatively uniform income from year to year results in the lowest income tax and largest homestead and farmland preservation credits over time. Keep in mind that even in a low income tax year you should try have enough income to utilize your personal exemptions and the standard deduction. The reason is that if you don’t use them you lose them.
It all starts with records. A good set of financial records helps to insure that all expenses are taken. Small expense items are often forgotten. A good record keeping system is essential for end-of year tax planning as well as working with your lender.
Once you have your records in order then you can do a tax estimate. Add up all your receipts and subtract expenses including depreciation. Add in all your gains and nonfarm income and subtract out your deductions for IRA’s, medical insurance and half of your social security tax. Then take out the standard deduction and exemptions to get your taxable income from which you figure your tax. Sound too simple? Just in case, TelFarm of Michigan State University Extension has a form which you can fill out by hand, complete with tables to help you do the estimate. Better yet, Michigan State University Extension has a computer program that can do the same thing. Or you may wish to consult your tax preparer.
Depending on your tax situation, you may wish to reduce or increase your net income for 2012. Some ideas for evening out your income include buying or delaying the purchase of supplies such as fertilizer, seed, small tools, etc. Pay in 2012 or delay to 2012 payments on real estate taxes. On capital purchases like machinery, you may elect to direct expense up to $139,000.
Watch timing of livestock or crops sales. Keep the direct expense deduction in mind when making capital purchases. Pay your children wages for work actually performed on your farm. Don’t forget expenses for educational purposes, travel connected with your business or entertainment expenses that further your business.
Tax planning now can make tax paying easier later on. For more tax management tips, TelFarm of Michigan State University Extension has a free publication called Tax Management Tips for Farmers.