Now is the Time to Make Commodity Gifts
Many farmers like to make gifts to their kids of grain since they know it can save some taxes. However, when you are gifting grain or other commodities to your children, it is important to make sure that the gift is of grain harvested in the prior year. If you gift harvested grain in the current year, you have to reduce your expenses by the allocated costs of that grain. Since most farmers are showing costs about equal to revenues, this would result in no income tax benefit to the farmer, however, the child would not have much tax owed either. Let’s look at some examples:
Farmer Johnson gifts $5,000 of grain to his daughter from grain harvested this year. He has to reduce his cost of grain by $5,000 which increases his income by $5,000 and since he owes full self-employment tax of 15.3% and he is in the 25% bracket, this results in additional tax of about $2.000. His daughter can sell the grain for $5,000 and owe no tax.
Now, let’s assume this is a gift of prior year grain. In this case, Farmer Johnson’s income goes down by $5,000 saving him $2,000 in combined taxes. His daughter now has a basis of zero and will be tax based on short-term capital gains at slightly less than 25% (the kiddie tax will apply). Let’s assume this overall tax would be $1,000. In this case, the family saves $1,000.
Now, if the daughter can wait a full year after harvest to sell the grain and Farmer Johnson happened to be in the 15% tax bracket (the $5,000 of grain income not recognized put him there), then the daughter would owe no capital gains tax and the family would save close to $2,000.
As you can see, there are several reasons why you want to gift grain to kids (or grandkids) from grain harvested in the prior year.
Now is a great time to make these gifts.