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Federal tax law changes can pose extra risks in high income year

May 5, 2014 | 0 comments

KIMBERLY

If there's one downside to the run of record high milk prices in early 2014, it's that dairy farmers might be vaulted into higher tax brackets in addition to not being able to take advantage of some tax law provisions that expired at the end of 2013.

At the spring farm management update for agricultural lenders and other agri-business professionals, University of Wisconsin-Extension Service farm tax law specialist Phil Harris outlined the basics of federal and state tax law changes that could affect the tax obligations, especially in a high income year.

The overall effect of the federal tax law changes lower some rates a bit but also reduce a number of the previously allowed deductions, Harris pointed out. "This will affect taxpayers very differently."

Tax law changes are affecting both individual and corporate taxpayers, Harris indicated. He said that most of the provisions that expired with the 2013 tax year date to the Bush era tax cuts, which were approved by Congress in 2001 and were in effect for up to 13 years.

Dairy income spike

Dairy farmers who are enjoying significant extra income this year have several options on how to manipulate taxes but a major one is largely gone, Harris pointed out. What's changed for 2014 is a reduction to $25,000 on the expensing limit on an investment up to $200,000 in the federal Section 179, which pertains to the expensing of depreciable assets by small businesses, he explained.

From 2010-13, the respective caps were $500,000 and $2 million. Harris reported that the Obama administration is supporting a $500,000 cap on Section 179 while the House Ways and Means committee is offering a proposal of $250,000. The bonus depreciation on new assets is also gone for 2014, he noted.

Given that the election campaign season is approaching, Harris does not expect Congress to act on any tax legislation this year. He observed that an additional reason that no new tax legislation is likely is the fact that Congress has made a permanent change to the Alternate Minimum Tax and has approved an indexing of the annual changes. He added, however, that Congress could still make retroactive changes.

Offsetting dairy income

What's still available to dairy farmers is the choice of three-year income averaging to reduce the one-year impact of what are likely to be record overall milk prices for 2014, Harris observed. He noted that this provision is available only to farmers and fishermen.

In replying to a question, Harris also indicated that dairy farmers can choose to delay the receipt of their end of the year milk checks — for a month of two — until early 2015. He emphasized, however, that this must be arranged with the buyer of the milk before that milk is shipped and observed that some buyers might not agree to do this.

Dairy farms and others with taxable incomes of more than $400,000 or $450,000, depending on filing status, will be a new tax rate of 39.6 percent on the taxable income above that amount (35 percent on the portion up to it), Harris pointed out. Capital gains tax rates will be 15 or 20 percent, also depending on the level of other taxable income.

Special situations

Only the farmers who would sell all of their assets during a single tax year would be likely to be affected by those latter taxes, Harris remarked. He also noted that the tax credit percentages for conservation easement donations have been lowered to 30 percent from the previous 100 percent of adjusted gross income for farmers while the timetable for any carryover has been cut to five years from the previous 15.

Congress has taken away the deductions for state and local sales taxes, Harris reported. But the increase in the personal exemption for married taxpayer filers is still in place, he noted.

With the gift tax exemption being bumped back up to $5 million per person for the transfer of property at death, most farm properties in Wisconsin should be fully covered, Harris stated. He also noted that the ceiling has been indexed for inflation and that a surviving spouse can pass double the amount without facing an estate tax.

Wisconsin has reconciled some of its tax rates and rules to correspond with what's in federal tax law, Harris indicated. Federal tax law recognizes same sex marriages for the purposes of tax filing but Wisconsin does not, he noted.

Farmers and manufacturers in Wisconsin can claim a 7.5-percent credit on their income taxes for any new investments, virtually cancelling the state's 7.5-percent top rate on income taxes, Harris pointed out. He added that the state has not adopted the federal provisions, which allows deductions for educators' expenses, the discharge of debt on principal residences, and interest payments on mortgage insurance premiums.

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