Friday, December 30, 2011
Get Ready For Income Taxes: Part 3Tweet
What will be your major income tax challenge for the year? For most farmers, it will be high income in 2011, based on good yields in 2010 and high market prices in 2011. The combination pushed net farm income higher than it had previously been, and the IRS will want to be paid on March 1. However, one allowance that the IRS provides may provide an opportunity to reduce your tax liability for 2011.
Visit with your tax preparer about income averaging for farmers with higher income in 2011 than in the past three years. Purdue University tax specialist George Patrick says income averaging will also benefit those with high income this year, which have made only limited use of the Section 179 Expensing provision. This could be a beginning farmer with minimal income the prior three years, or someone with a new off-farm job that caused household income to expand sharply higher, or retiring farmers who liquidated their possessions in the past year and have nothing to reduce the income from asset sales.
Patrick’s annual tax guide for farmers outlines a series of examples how unused tax brackets from the past three years can be used to reduce the tax liability for 2011. Farmers will not be shifting excess income into a prior year and filing an amended tax return for that year, but will be dividing 2011 income among three years and paying tax on it based on tax brackets that were not used because income was not high enough to fill them.
For example, a farmer which had reached the 28% tax bracket for the first time had had used income averaging, he could spread some of the higher income into the 15% tax brackets for the prior three years and pay increased taxes at the 15% rate. The overall benefit would be to reduce the amount of taxes paid this year at a higher rate.
Patrick says it is also possible for ordinary income to be averaged over the prior three years, and capital gains to be kept within the current tax year, or for capital gains taxes to be allocated to several prior years also.
Persons who have a large tax liability this year, and no tax liability from farming for prior years are not prevented from the use of income averaging. The provision is open to anyone who may not have been farming in other years, but has income from 2011 that qualifies for being distributed into lower tax brackets over the past three years. Consequently, someone who will be selling farm assets in a coming year will be able to use tax brackets from the current year. The IRS realizes that it may take more than one year for a timely disposition of farming assets.
The potential for high income tax liability for 2011 should have many farmers considering the use of income averaging, and spreading current income among unused tax brackets from prior years which were not fully used. This will reduce the tax liability with a method that the IRS allows farmers because of the variability of income from year to year.
Posted by Stu Ellis on 12/30 at 01:05 AM | Permalink