Relief for Older Farmers with IRAs
The Tax Extenders bill made permanent the ability for older taxpayers to contribute up to $100,000 of their IRA holdings directly to a charity. For many older farmers, this option can save them income taxes. There are several situations where this may help a farmer. We will review three of the options to see how much money it might save a typical farm couple.
Example #1: Ted and June Jones are each age 72. They receive $100,000 of cash rent for their farmland. Ted was also required to take a minimum distribution (RMD) of $12,000 in 2015. They do not itemize their deductions even though they give about $12,000 to their local church each year. Their current total income taxes for 2015 (they live in Iowa) is about $20,900. If they, instead contributed $12,000 from their IRA directly to the church, this reduces their overall tax liability to $16,800 or savings of $4,100 or a 20% reduction in tax.
Example #2: Ted and June Jones only receive $30,000 from cash rent, but also receive about $25,000 of social security benefits. The total tax on all of their income is about $4,200 including the $12,000 RMD. If they contribute the IRA directly to their church, their tax liability drops to $1,200 or a savings of about $3,000 or a 71% reduction in tax.
Example #3: Ted and June Jones receive $250,000 of cash rent income during 2015. With the $12,000 RMD, they are required to pay about $75,500 of federal and Iowa income tax. By contributing the IRA directly to the church, their income tax liability drops to $70,200 or a reduction of $5,300 including eliminating the net investment income tax of about $500.
As you can see, even if you are in the lowest income tax bracket (example #2) or a high income tax bracket, in many situations, the ability to contribute your IRA directly to a charity can save you income taxes. This option is available for those taxpayers age 70 1/2 or over and the maximum amount that you can contribute using this method is $100,000.
Paul Neiffer, CPA
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.
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