AUBURN, Ala. – Alabama Extension has been holding Drought meetings for Livestock Producers across the state in recent weeks and more meetings are scheduled. Since the majority of Alabama livestock producers farm part-time, this document reviews some of the tax strategies available for part-time farmers.
NOTE: You should review all tax planning options with your accountant before year-end for best results for your individual tax situation.
Sample Situation: Local livestock producers sells majority of herd due to drought and ends up with $20,000 more in expected income than in normal years. Producer and spouse both work off farm in W-2 jobs for the majority of their income. Farm generally shows small profit or small loss each year. What are some options for this producer to discuss with their accountant?
Strategy 1. Conserve Cash for Future Operations.
- Pay tax on extra $20,000 in profit and save the balance to re-invest in cattle operations when cattle prices improve and rainfall returns closer to normal.
- Producers should consider value of future Social Security payments and Medicare coverage for future retirement needs.
Strategy 2. Spend Cash on farm operations to reduce 2016 profits.
- Buy extra feed and other inputs to increase 2016 expenses to reduce farm year-end profit.
- Buy additional equipment to increase 2016 expenses and use fast depreciation to write off fixed assets in 2016.
- Pay teenage children under 18 wages for farm work.
- Example 1: Pay 16 year old dependent $5,000 for farm work (don’t forget to document work responsibilities and time sheet). Dependent child files separate tax return from parents and pays income tax on farm wages. FICA and MC taxes are not required to be withheld on producer’s children.
- Example 2: Pay 16 year old dependent $10,000 for farm work. Have dependent child open personal IRA for $5,000 and file individual return on remaining $5,000 income.
Strategy 3. Spend Cash and make maximum traditional IRA Contribution for Producer and Spouse.
- Producer and spouse can each contribute $5,500 to a new or existing IRA to reduce taxable income. Maximum IRA contribution for over age 50 taxpayers is $6,500 each. If taxpayers have pension or 401K plans, IRA deductions may be reduced.