Farmers can lower their taxable income and plan for the future of their operations by taking advantage of several provisions included in the recently approved American Taxpayer Relief Act of 2012, says The Farm CPA Paul Neiffer.
Neiffer provides a quick video analysis:
Read on to learn about changes to capital gains, Section 179, bonus depreciation, the federal estate tax and the alternative minimum tax (AMT). Click on the links included throughout the article to read additional analysis of the tax changes in Neiffer’s blog.
Capital gains rates multiply
Whereas the federal government previously recognized two capital gains rates–0% for couples whose taxable income was less than about 70,000 and a flat 15% for those making anything above that–it now effectively recognizes at least 10, Neiffer says. Capital gains rates most often affect farmers who purchase farmland and later sell it at a higher price. The difference between the purchase price and the sale price is taxed at the relevant capital gains rate.
(Read more in The Farm CPA blog: Up to Ten Capital Gains Tax Rates for 2013!)
Under the new law, factors affecting the capital gains rate include income bracket, itemized deductions, gross income and personal exemptions. For example, a farmer who itemizes deductions and has a gross income above a certain level will experience phaseouts of itemized deductions and personal exemptions. A Medicare surtax also comes into play for people in some higher-income brackets.
In general, most farmers making less than $250,000 per year will pay a capital gains rate of 15% starting with the 2013 tax year, Neiffer says. The 0% rate will still apply for lower -income taxpayers. Those making above that amount generally will pay a tax rate between 19% and 25%, based on taxable income. In the case of couples with a large family, the effective rate maybe even higher.
High-level Section 179 deduction extended
Farmers who have benefited from the Section 179 deduction for farm equipment and some land improvements will continue to enjoy a high deduction amount of $500,000 for the 2012 and 2013 tax years, Neiffer says. For the years before the Sept. 11 attacks, the deduction never amounted to more than $25,000. For the last several years, the deduction has fluctuated between $125,000 and $500,000 in an effort to encourage machinery buying and stimulate the economy. The deduction will drop back to $25,000 in 2014.
(Read more in The Farm CPA blog: Section 179/Bonus Depreciation)