Maximizing Your Farm Investments to Minimize Your Tax Liability How to most effectively increase income or expense to meet your taxable income goals.

Overview John Doe’s Information We know he doesn’t have a huge tax liability to manage. But… should he take other steps to maximize his tax investment? You were previously introduced to John Doe and his tax situation for this year. If you recall, John was going to have a net tax liability of $191. You’re thinking, “Wow – this is great! I hope to have that good of a situation after this year’s high commodity prices.” But wait, would it be a good idea for John to consider other alternatives? That way he would be making a better tax investment.

Here is John’s Federal Tax Planner as a refresher for you Here is John’s Federal Tax Planner as a refresher for you. Again, we have 3 other options to consider with this spreadsheet. So, let’s see what effect additional income or additional expense would have on John’s out look by year end.

Additional Income… In option 2 we have John taking in an additional $5,000 in income. This may be difficult for John, as his milk sales can’t be increased for this year like grain sales can be. But, he could maybe get a pre-payment on manure sales - as the producer he is working with may be looking for an additional expenditure. Or, maybe Mary can realize more income from her business. What does this do for John & Mary? Well, it now gives them a federal tax liability. But, increasing income by $5,000 only changes their federal tax by $1,121. This also helps him take in more income at the 15% rate. In the first scenario he is already realizing about $2,000 of income at the 15% rate. If he is increases his income this will increase to $7,000 at the 15% tax rate. In all actuality, John could take in approximately $9,000 more income before his state tax rate increases and approximately $45,000 in income before his federal tax rate would increase to 25%. Also, just to be clear. The first $15,650 of income will always be taxed at the 10% rate and the next $48,050 will be taxed at 15%, and so on. Let’s look at John’s situation if he decides to pre-pay expenses for next year, just as he was thinking he would have to do.

Pre-pay Expense… As you can see John pre-paying more expense doesn’t make a lot of tax sense. In this case he would be paying an extra $5,000 to get an additional $1,171 refunded. If you remember our previous discussion, getting a refund maybe nice right now, but could be costly in the future if you have not paid enough into Social Security. Therefore, I would suggest that John does not pre-pay any expenses for next year. In this case, it is not a wise tax investment move.

Even More Income… In this case, John would take in an additional $13,000 in income. As discussed before this would have the effect of maximizing his investment both on the state and federal bracket. Also, this $13,000 in additional income will only cost him about $3,000 in tax. If John thinks that he has some unusually high expenses this year or has some “old” depreciation that will be used up he may want to take in this additional income. This will help his tax situation in subsequent years – something that a wise business person will consider from year to year.

Total Tax Liability – All The Options Here you can see the net tax effect of the different options. Again: Option 1 – typical until year end Option 2 – an addition $5,000 in income Option 3 – pre-pay $5,000 Option 4 – an additional $13,000 in income It would be John’s personal decision, but taking up to $13,000 in additional income seems to make the most business sense to me. Here he would be better maximizing his tax brackets to aid his situation this year and even possibly for next year. Again, the graph above helps lay out the information for you to ensure you wisely spend your tax dollar

Questions… If you still have questions concerning the following Webinar presentations please contact: Jim Marzolf – jim.marzolf@southcentral.edu Pauline Van Nurden – pauline.vannurden@southcentral.edu