Will Your Tax Go Up or Down?
Since there is a House Tax Bill and Senate Tax Proposal, I thought I would work up the estimated income tax owed by a farmer for receiving an extra $10,000 of net farm income. I am ignoring any self-employment adjustments since both proposals state that self-employment tax calculations will remain the same (we think). I am assuming that the 9% DPAD deduction is allowed under current law. For tax rates under 25% for the House Bill, I am assuming it is taxed at the maximum 9% tax rate (phased in from 11% in 2018). Once the tax rate hits 25%, I then calculate $3,000 at 25% and the remaining $7,000 at the rate shown (either 25%, 35% or 39.6%). For the Senate calculations, I simply multiply it by the rate times 82.6% to reflect the 17.4% reduction for active farm income.
We know that there will be adjustments under either proposal based on either the deemed rate of return or other adjustments. However, I am trying to keep it simple and see net tax owed and how much either proposal saves or costs versus current rules.
Here is my table of values (note all numbers based on married rates):
You will notice that in all amounts of taxable income that by adding an additional $10,000 of farm income that the Senate proposal saves tax and the percentage savings ranges from a low of 3.7% to a high of 31.2%. The House Bill saves the most tax for farmers that are in the 25% tax bracket under current law, but still in the 12% tax bracket under the House Bill at the highest savings of 47.3%. Once the income goes into the 25% tax bracket, the House Bill costs the farmer between 6.6% and 9.9% and it takes until the current rates hits 39.6% before the House Bill finally goes positive again.