The fiscal cliff created an opportunity for a number of changes in the tax rules and regulations related to when a farm must complete and file their annual income tax returns.
For 2012 farm income tax returns, farms have been given an extension from the normal March 1, 2013, to file their tax returns without penalty until April 15, 2013 if they have not made estimates.
Farms that elected to delay completing and filing their tax returns after March 1, 2013 will need to include a Form 2110F as part of their returns. The Form 2110F is a waiver that was part of the enactment of the American Taxpayer Relief Act (ATRA).
To qualify, at least two-thirds of the taxpayer’s gross income must be from farming in either 2011 or 2012. Much of the guidance from the IRS is still in process due to the late enactment of ATRA after the end of 2012.
Farms needed to do a much better job at planning the past few years to manage income levels and avoid a major spike that would trigger a substantial increase in farm income taxes.
Looking at 2013, some of the changes that may impact farms putting together a farm business plan are:
• The 179 expense election for 2013 was set at $500,000. This allowance provides an option for accelerated depreciation on new or used machinery or equipment purchases for the year of the purchase. There is a dollar-for-dollar phase out if your farm purchased more than $2 million of depreciable capital assets during 2013.
• In addition, a farm has the option to take a 50 percent “Bonus Depreciation” of adjusted basis after 179 expensing. This option only applies to new property placed in service during 2013 that has a depreciable recovery period of 20 years or less. This option is scheduled to expire at the end of 2013.
• Long-term capital gains and qualified dividend income now has a new 20 percent tax rate for individuals in the higher tax brackets. Capital gains are still taxed at a 0 percent rate for individuals in the 10 or 15 percent tax brackets.
• Those in the middle brackets (above the 15 percent tax bracket, but below the 39.6 percent bracket) will pay 15 percent capital gains taxes. While those that have incomes above $400,000 for individual or $450,000 for married filing jointly.
New tax rate
• Beginning in tax year 2013 (generally for tax returns filed in 2014), a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates — 10, 15, 25, 28, 33 and 35 percent — remain the same as in prior years. The guidance contains the taxable income thresholds for each of the marginal rates.
• The annual gift tax exclusion is increased to $14,000 that can be given to any person without any reporting requirements.
• A Return to Itemized Deduction Limits for higher-income farmers brings this limit on itemized deductions back into effect for higher-income farmers for 2013 and subsequent years. The limitation affects farmers with adjusted gross income (AGI) over a threshold amount ($250,000 for farmers filing single or $300,000 for farmers filing jointly). Generally, farmers affected by this rule will have their itemized deductions reduced by 3 percent of the amount by which AGI exceeds the threshold amount. The reduction is subject to a “cap” that is part of the formula which is triggered if the farmer’s income is high enough.
• Two new Medicare taxes are now in place for individual incomes over $200,000 or $250,000 married filing jointly now have a 3.8 per cent Medicare tax applied to passive income like dividends, interest and capital gains. In addition a new .9 percent Medicare tax is in place
• Alternative Minimum Tax (ATM) was set at $78,850 for 2012 and with inflation index will be $80,750 for 2013. This represents the income level below which ATM tax should not apply. Having this number in advance should aid farms in planning if they hope to avoid this tax.
• The standard deduction rises to $6,100 ($12,200 for married couples filing jointly), up from $5,950 ($11,900 for married couples filing jointly) for tax year 2012.
• The American Taxpayer Relief Act of 2012 added a limitation for itemized deductions claimed on 2013 returns of individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly).
• The personal exemption rises to $3,900, up from the 2012 exemption of $3,800. However beginning in 2013, the exemption is subject to a phase-out that begins with adjusted gross incomes of $150,000 ($300,000 for married couples filing jointly). It phases out completely at $211,250 ($422,500 for married couples filing jointly.)
•The Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 ($80,800, for married couples filing jointly), set by the American Taxpayer Relief Act of 2012, which indexes future amounts for inflation. The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly).
• The maximum Earned Income Credit amount is $6,044 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $5,891 for tax year 2012.
• Estates of decedents who die during 2013 have a basic exclusion amount of $5,250,000, up from a total of $5,120,000 for estates of decedents who died in 2012.
• The amount used to reduce the net unearned income reported on a child’s tax return subject to the “kiddie tax,” is $1,000, up from $950 for 2012.
• The foreign earned income exclusion rises to $97,600, up from $95,100 in 2012.
As farms manage more gross income, the need for improved financial accounting systems and increased management of farm income becomes necessary. Michigan State University Extensionrecommends that farms consider financial management options like the Telfarm Farm Financial management system.
Information on agricultural tax topics can be found in the “Farmers Tax Guide,” publication 225. This publication along with others is available from the IRS by calling the IRS directly at (800) 829-1040 or going to http://www.irs.gov. You can also find several tax related articles and helpful links by visiting the FIRMfarm management webpage under the Tax Information Resource tab.