How to Handle Gift of Grain

We got this question from one of our readers:

“My grandfather gave me a generous gift of soybeans for my college fund. Since he gave me the actual crop, he paid no taxes on it. When I sold it I received a check of around $8,000. I will have file a tax return for the first time. How do I calculate what taxes I owe on the $8,000?”

As with many tax questions we get, the answer to this question is it “depends” on whether she is claimed as a dependent on her parents tax return.  We will give the answer for both situations.

If she is not a dependent, then she will report the sale of soybeans as a short-term capital gain (assuming she sold it within a year of harvesting the beans).  Her sales price is $8,000 and the cost basis is zero, therefore her total gain is $8,000.  If she has no other taxable income for the year, her standard deduction and personal exemption will completely offset this gain.  Therefore, she would owe no tax.  However, in certain states, the $8,000 gain would be subject to some state income taxes since their exemptions and standard deductions are lower than federal amounts.

Now, if she is claimed as a dependent, then the short-term capital gain will essentially be subject to her parents tax rate.  For example, if her parents on are in 25% tax bracket, she would owe about $1,750 in income tax on the gain (the first $1,000 is normally exempt from tax).  Again if she is in a state with an income tax, she would owe the same amount of state income taxes.

If she held the grain for more than a year from harvest, this gain would become long-term and if the parents are in the 15% tax bracket, then the gain would be taxed at zero.

The gifts of grain are a valuable method of reducing income tax for the farmer.  The gift eliminates this amount of income from both income tax and self-employment taxes and in the case of a child or grandchild who is not a dependent of the grantor and is in a very low tax bracket, in many cases we can completely eliminate the income tax on the gifted grain.

One final recommendation is that the grain be gifted of a prior year harvested crop.  If the gift is of grain from current year crop, then the farmer has to reduce their expenses by the cost of the grain.  This cost carries over to the recipient, however, it is much better to gift prior year’s crop since you no longer have to make that calculation.  All expenses are allowed and the basis in the crop gifted is zero.

Paul Neiffer, CPA