September 29, 2023
As the end of the year approaches, money conversations for many farmers and ranchers shift from maximizing profit to minimizing taxes.
Federal tax law provides many tools for those filing a Schedule F to reduce their tax liability. Working with farmers and ranchers over the past 10 years, here are the five biggest tax mistakes I see producers make:
1. Not seeing your accountant soon enough. It’s a busy time of year. Harvest is in full swing; the holidays are just around the corner. The last thing most farmers and ranchers want to do is stop and discuss taxes. This can be detrimental to a successful tax strategy.
Getting into your tax preparer in November or early December can help you with not only your year-end purchases, but also your year-end sales. Get these meetings on your calendar now. If their recommendation includes large year-end purchases, you will also need to consult your banker.
2. Ignoring the tax bracket. The federal income tax system uses brackets to determine a person's tax liability. When developing a tax strategy, it is crucial to know not only which tax bracket you are in, but also if you are at the bottom, middle or top of the bracket.
If you are at the bottom of the bracket, reducing your tax liability is beneficial to drop you into a lower bracket. If you are in the middle or upper end of the bracket, taking additional deductions may not reduce your marginal tax rate. If you are on the upper end, you should not make any additional income as it may increase your marginal tax rate.
3. Not knowing what is deductible. Comb your expenses for items that can be deducted and discuss these deductions with your tax preparer. Check out the IRS Farmers Tax Guide for more information at irs.gov/publications/p225.
4. Not using all available tools. Federal tax law provides an arsenal of tools to help farmers and ranchers mitigate tax. Having an accountant experienced in agriculture is vital to choosing the right tools. When considering minimization strategies, think about the ripple effect of those decisions through your operation.
Make sure your accountant is providing you with multiple options to mitigate your tax liability. One of the most underutilized tools is making retirement plan contributions. On the other hand, purchasing a new piece of equipment just to qualify for accelerated depreciation may not be the best tool, especially as we are entering a period of lower grain prices.
5. Not qualifying for Social Security. If the farm or ranch is your only source of income, showing little or no profit year after year means that you may not be qualifying for Social Security benefits. Social Security provides retirement benefits to qualifying individuals beginning at age 62, although holding off taking benefits until your full retirement age is often recommended.
Social Security provides benefits for life and can be a vital resource for those without enough retirement savings. Social Security also provides disability and survivor benefits that can assist you or your dependents. In order to qualify for Social Security, you must pay Social Security/self-employment taxes for a certain length of time. See if you qualify for Social Security by visiting ssa.gov/myaccount.
Want to learn more about tax planning basics?
The Nebraska Women in Agriculture Program will be hosting a workshop series titled “Tax Strategies for Midwestern Farm and Ranch Women” in November and December. This program is a three-part virtual workshop that will be held from 6:30 to 8 p.m. CST Nov. 28, Dec. 5 and Dec. 12. Participants should plan to attend all three sessions.
This workshop series will focus on the basics of tax planning for farms and ranches. Attending this series offers you the chance to network with other women in agriculture while building your tax management knowledge and skills. Find out more about the workshop at wia.unl.edu.
Groskopf is a Nebraska Extension agricultural economist.
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