Amid concern about current low commodity prices, farmers may not realize that their 1998 taxable income could be substantial, unless they plan now to reduce their tax bill.

"Many farmers carried into 1998 large inventories of grain and livestock, which they sold during the current year, boosting their 1998 income. In addition, loan deficiency payments and market transition payments could balloon taxable income. Smart farmers will assess now what their tax liability will be and if necessary take steps to reduce that before December 31," according to David Heisterberg, Extension agricultural economist with the University of Kentucky College of Agriculture.

Farmers should begin to review their 1998 taxable income now and project their 1999 cash flows, he said.

Heisterberg said farmers can use several tax provisions to help minimize their tax bill for income in 1998, but they need to act quickly to take advantage of them.

Income averaging, he said, has been made a permanent provision for farmers, but that it will benefit only those whose taxable incomes have moved into a higher bracket compared with the previous three years.

Certain depreciable assets can be "written off" for up to $18,500 of their cost, he said, however, business vehicles have a lower limit of "write off," he said.

The capital gains holding period has been reduced from 18 months to 12 months. For capital gains income that regularly would be taxed at a 15 percent rate, the capital gains rate will be 10 percent. For all other capital gains, the rate will be 20 percent.

Participation in one or more of the many types of retirement plans can reduce taxable income. Farmers should know the advantages and disadvantages of each before they make a decision to participate, he said.

A popular strategy to reduce income tax is to shift incomes to children, by paying them wages for the labor they contribute to the farm. Generally, children's incomes are taxed at a lower rate. However, he said, the IRS has a "Kiddie Tax" for children under 14 which may increase the marginal tax rate on investment income.

And remember, he said, that the education tax credits and deductions also may be used to reduce taxable income.

Self-employed farmers who pay for their own health care insurance can deduct 45 percent of the premium cost from their taxable incomes.

Heisterberg said that because of the complexity of the tax laws, many farmers would benefit from consulting a tax expert before they make any decisions that might affect their tax bill.