October 15, 2003 | By: Laura Skillman
PRINCETON, Ky.

Careful tax planning in the coming weeks can mean a reduced bill come tax time.

Once harvest is complete, farmers need to begin the tax preparation process, said Craig Gibson, a University of Kentucky farm management specialist in the College of Agriculture. With high soybean prices and high feeder cattle prices, some farmers could be seeing higher incomes in 2003 than in the previous year. Much of that will be determined by when they market those beans and cattle, he noted.

In 2000 and 2001, high levels of government payments added to farm income, while they were much lower in 2002. In 2003, government payments likely will be somewhat higher than 2002 levels due to adjustments made as a result of sign up in the 2002 farm program. But they will be nowhere near the levels of 2001 or 2000, Gibson said.

“To confuse the matter, 2002 crops were not very good and we saw incomes on an accrual basis in our area anywhere from 50 to 75 dollars per acre lower than the previous year,” said Gibson, whose office is in Henderson. “So, if a farmer is in a pattern of selling in the year following production, that would suggest that net incomes would be lower in 2003 than in 2002 for tax proposes.”

Farmers can use several tax provisions to help minimize their income tax bill in 2003. Good income and expense records are key to tax planning and optimizing tax savings.

“If it appears their income is substantially higher, then that’s when they need to be looking at some of these things like equipment purchases,” Gibson said. “But, if they’re quite low, it could go the other way and they may want to receive some income before the end of the year to try and balance their income out.”

Under tax changes for 2003, an acceleration in the amount of depreciation that can be taken on a new piece of equipment gives a great deal of flexibility.

In 2002, there was a 30 percent bonus depreciation on federal income taxes that could be applied to new equipment and building purchases. That 30 percent level is still in place, but another level of 50 percent has been added on new purchases made after May 5, 2003, Gibson said.

“There is also what’s called a Section 179 deduction that is appropriate for equipment but not buildings that are new or used but new to the purchaser,” he said. “So it gives a great deal of flexibility to anyone doing tax planning.”

But, Gibson noted there is a down side.

“There still has to be an ability to repay, if you borrow money to make the purchase,” he said. “So you balance the ability you have to repay a loan versus trying to reduce or eliminate income tax.”

Changes in capital gains provisions will be helpful to someone selling a farm or selling breeding livestock, Gibson said.

“We have been working with two capital gains rates depending on income level. At the higher rate we have been at a rate of 20 percent, but for sales made after May 5 it drops to 15 percent. So there’s about a 5 percentage-point reduction which effectively lowers their income tax,” he said.

Other changes can impact farmers and nonfarmers. There is a higher child tax credit this year, income tax brackets have been changed and the standard deductions for people who do not itemize are higher.

Self-employed farmers who pay for their own health insurance can deduct 100 percent of their premium from their taxable income. Participation in many types of retirement plans can also reduce taxable income.

Income averaging over a three-year period is also available for farmers and provides another option to lower taxes by placing them into a lower effective tax rate bracket than where a single year’s income will place them.

As farmers begin the process of reviewing their records, Gibson noted that tax rules are complex and farmers would benefit from consulting with tax planners to help in the decision process.

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Contact: 

Writer: Laura Skillman 270-365-7541 ext. 278
Source: Craig Gibson 270-827-1395