11/5/2008 9:55:00 AM End-of-year tax reminders Consider these strategies to help curb your tax bill
By Kindra Gordon
Money is on everyone's mind today - particularly how to keep more of your hard-earned cash and payout less in taxes. While taxes can't be eliminated, they can be minimized with a measure of planning. You might consider going into 2009 with prepaid feed, or buying new equipment before Dec. 31, 2008 to up your expenses. When are these good ideas to help your tax situation and when are they not? Here's a round-up of advice that may help your ag operation lessen tax consequences.
1. Plan Ahead. Tax advisers all agree that taking the time to sit down with a tax professional and visit about tax plans before year-end may help pinpoint some opportunities for saving. Because every operation's situation is unique the advice of a professional can often pay for itself.
In preparing for your tax planning meeting, tally up income and expenses for the year to get an idea of your estimated taxable income. Use the previous year's tax return as a guide. Keep in mind that subsidy payments that are directly linked to production, such as the loan deficiency payments (LDPs) and counter-cyclical payments, are counted as income.
2. Pre-pay or defer expenses. Another common tax strategy is to prepay expenses before year-end - but there may also be some situations where you want to defer expenses until the following year.
This is where having a good idea on your income status for the year becomes important. For instance, if you have a big profit for this year already and you're a cash-basis taxpayer, you may need a large feed bill as a deduction. But if you need the deduction more for 2009, then you may decide to wait and pay it in 2009. No matter what the situation, always keep your receipts for your records.
With this being an election year, some tax advisors do suggest taking the change in the White House into consideration. You need to consider if there may be a higher tax rate or reduction of deductions in future years.
3. Delay income. Like manipulating which year your expenses land in, the same can be done with income. Perhaps you hold off on selling your crop until January 2009. But keep in mind that this needs to be beneficial for your situation and the crop you are selling. For instance, holding grain to sell into the following year isn't hard to do. But holding cattle - when they are at the right market weight - may not be an option.
On the other hand, if you are a consultant or are selling products/services, it is easier to manipulate which year your income lands in. For example, unless you have reason to believe that next year will bring you a higher income and move you into a higher personal income tax bracket, you may want to defer income until after the first of the year. If you are self-employed, for example, send invoices out late in December so you will more likely receive payment in January.
4. Contribute to retirement plans. An often overlooked, but valuable deduction, are retirement plan contributions. These can include traditional IRAs, Savings Incentive Match Plan (SIMPLE) IRAs or Self Employed Plan (SEP) IRAs. Working with your tax planner can help determine the contribution amount that can fund your future rather than writing a check to Uncle Sam.
5. Consider forming a corporation. Many farms and ranches have found perks in forming an "S" or "C" corporation - where the corporation becomes a separate taxpayer. The corporation can deduct some things that you, as a sole proprietor or partnership, can't deduct. Some examples include health insurance premiums and medical expenses not covered by insurance, some meals for employees (including you) and some utilities and other expenses for the farm residence. This decision will also effect your Social Security payments and requires considerable evaluation. Discuss the option extensively with your accountant to determine if it is right for your operation.
Additional Ideas
6. Sell losing stocks. If you have a few loser stocks that you wouldn't mind unloading, end of year may be the time. By selling some losers you can use the tactic to wipe out all your realized capital gains for the year, plus another $3,000 ($1,500 for married filing separately) in regular income. But avoid a wash sale - buying the same security within 30 days before or after you dump shares. Tax rules disallow the loss.
If you have realized losses over $3,000, consider selling enough winners to get back to that magic number. Taking the gains will add zero to your tax bill. (However, remember the 30-day rule and sell only shares you can kiss goodbye without regret.)
If you have both unrealized gains and losses in your portfolio, but want to make some sales, here is how to match them to best effect.
First, the general rule is to sell long-term winners (held over 12 months) first to benefit from the 15% maximum long-term capital gains rate. Then, unload your short-term holdings.
A tip from SmartMoney.com suggests you will generally get the most tax-saving bang for the buck with a short- term loss. This is because short-term losses first go to offset short-term gains that would otherwise be taxed at your regular income tax rate (which can be as high as 35%). Any leftovers then offset long-term (15%) gains.
7. Pay your January 1st mortgage payment on or before December 31st. This allows you to take an additional deduction for interest paid. Remember to add the interest amount to the amount reported by your lender when they send you a 1098 form.
8. Make charitable donations. If you have extra cash, donate money to charity - but be sure to save receipts. Charitable donations can be used as deductions on your tax return.
9 and 10. Consider drought exceptions and conservation credit options. There are various sections of the tax laws that can apply to producers in different parts of the country dealing with drought. Many are designed to defer tax liability for the forced sale of cattle due to drought as long as they are replaced once climate and growing conditions improve. Drought provisions do vary by state, so it is important to visit with your tax planner should these options be available to you.
Also, some conservation-easement programs enable landowners to donate land for conservation purposes and receive major tax benefits. Again these vary by state and program, so it is important to talk with your tax or estate-planning consultant. More information is also available at www.lta.org/farmersandranchers.
