Although Phase II tobacco payments were released to Kentucky tobacco growers in January 2,000, the income must be reported on the 1999 tax forms.

"The tax on Phase II money does not have to be paid this year, but a 1099 form was sent with all Phase II settlement payments," saidDarwin Foley, an area farm management specialist in the UK College of Agriculture. "This means the IRS will be notified of the payment and it willbe essential to report the income to them on the 1999 form."

Producers can choose not to pay the tax this year by filling out some additional information on the appropriate tax form. Based on the best interpretation of specialists within the agricultural economics department of the University of Kentucky College ofAgriculture, there are two ways to properly handle this on the federal tax form.

For those who actually raised a tobacco crop, Phase II money should be reported on Schedule F, Line 10, listed as "Other Income." If thetaxpayer does not want to pay income tax this year on this money, then the amount of the Phase II check should also be deducted as "Otherexpense," on Line 34 of Part II with a very brief explanation that the income was not received until January, 2000. However, this income will haveto be reported and taxed in 2000.

For Phase II recipients who were not involved in tobacco production, such as landlords and quota holders, the Phase II payment should bereported on IRS Form 4835, Line 6, which is listed as "Other income."

If the taxpayer, in this case, options to wait and pay the tax until next year, they should go to Line 30 in Part II and deduct the identicalamount with an explanation to the IRS.

"Some people may be a bit confused about this money having been reported to the IRS as 1999 income because the form that wasattached to their check did not look like the normal 1099 (MISC) miscellaneous form," noted Foley.

Settlement money recipients are urged to discuss this situation with their tax preparers to make sure the right information is included on the1999 forms.