Don’t Forget Farm Income Averaging
With the March 1 farm tax return deadline rapidly approaching, I want to remind our farmers to make sure they actively review their tax return to see if farm income averaging will save them money this year. Farm income averaging allows you to smooth out your income tax liability for the current year if this year’s income spikes from the previous three years. Without farm income averaging, a farmer may end up paying tax in a much higher tax bracket than they need to.
For example, let’s assume a farmer had exactly zero taxable income for 2008, 2009, and 2010. In 2011, the farmer has taxable income of $270,000. At this level of taxable income, his income tax for the year would be approximately $66,500 and he would be in the 33% tax bracket. With farm income averaging, we could assign between $65,100 and $68,000 of income to 2008, 2009 and 2010. This would soak up the 15% and 10% tax brackets for those years. We then pretend the farmer paid the respective tax for each year and add those taxes to the remaining amount taxed in the current year. This results in all of the taxable income being taxed at either 15% or10% for a total tax of about $37,200. By making this election in 2011, the farmer permanently saves over $28,000 of income tax for the year.
This is a great provisions for farmers, but you must review the return to make sure you or your tax advisor took advantage of it. If you don’t; it can cost you a lot of money. The rules can be complicated so you need to review it with your tax advisor.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
This is a very labor intensive process. Do not expect this to be done correctly by anyone that is not a seasoned farm tax return preparer. Most CPA’s do not understand this, and their software will not fully handle this. Great generalized example Paul.