We had several readers respond to our post yesterday asking for a couple more examples for a more “typical” situation.  The seminar included other examples.  One example was a married couple with three children and “normal” itemized deductions with the husband earning $100,000.

In this example, the gross income tax owed for 2011 was $7,779.  After a $3,000 child tax credit and a $1,500 education credit, the final tax amount was $3,279.  For 2012, the tax is currently scheduled to increase to $4,860 unless they extend the AMT “Patch” increased exemption amount.  If this is extended (which should happen, but may not), the actual tax owed would be $3,184. 

In 2013, the total tax bill would be $5,860 or an increase of almost $2,600 from 2011 or a 79% increase.  In addition, their families FICA tax would increase by $2,000.  Although a much smaller number than the example yesterday, this is a much higher percentage increase in tax.

The primary reason for the large increase is the child credit is reduced from $1,000 per child to only $500 per child.

Another example with a husband earning $100,000 and the wife earning $50,000 with a long-term capital gain resulted in their total tax bill going from $26,625 in 2011 to $34,375 or an increase of $7,750 or about 29%.

For most taxpayers, even if Congress does extend the Bush and Obama tax cuts for another year, if the AMT “Patch” is not enacted, most taxpayers would see little or no benefit from the extension.  The AMT number becomes larger and larger each.

 Paul Neiffer, CPA

As part of our normal tax planning updates at our firm, we had a two hour presentation on how the Fiscal Cliff may affect some of our taxpayers.  As many of you know by now, on January 1, 2013 the Bush and Obama related lower tax rates are scheduled to expire along with many other programs designed to save taxes.  Additionally, alternative minimum tax (AMT) relief for this year is still not in effect which may subject many millions of taxpayers to the AMT for the first time.

One of the slides that was presented showed the effects of this “Fiscal Cliff” on a sample taxpayer.  This taxpayer had wages of $400,000, interest income for $100,000, qualified dividends of $100,000 and long-term capital gains of $100,000.

Under 2012 tax laws, their federal income tax liability would have been $190,000.  With the new 2o13 laws (unless changed), their income tax increases by $60,000 to $250,000.  This is a roughly a 31.5% tax increase.

The primary increases relate to the increase of the tax rates and related compression of the tax brackets and the taxing of qualified dividends at ordinary tax rates.  Here is a recap of the relevant changes:

• Employee FICA on wages (reflects expiration of 2% payroll tax cut) – $2,200 increase
• Tax on qualified dividends – $24,600 increase
• Tax on long-term capital gains – $5,000 increase
• Phase-out of personal exemptions – $1,500 increase
• Compression of tax brackets/increase in rates – $13,500
• 3.8% Medicare surtax on passive income - $11,400 increase
• 0.9% Medicare tax – $1,800 increase

All of these increases add up to the overall increase of $60,000.  Also, the taxpayer had itemized deductions, another tax increase of around $4,000 would probably have resulted.

We will have many of our taxpayers in similar situations and this is what they will face in 2013 in changes are not made.  With some planning, we can minimize some of these tax increases, but many may be beyond our control. 

What will it mean to your taxes.

 Paul Neiffer, CPA

The IRS recently released Revenue Procedure 2012-41 that outlined all of the inflation adjusted items contained in the tax laws.

There were a couple of provisions related to gift and estate taxes that apply to farmers.

Beginning in 2013, you can now give up to $14,000 any individual(s) during the year and not have to report this on form 709.  If you give more than this amount, you are required to file a return, however, in most cases, this gift will still be free from gift taxes.  You could give $13,000 in 2012.  Although this amount is adjusted for inflation, it does not change until the amount increases by more than $1,000.  Therefore, the next increase will be to $15,000 and this will probably take three or more years assuming current inflation rates.

Another estate tax adjustment is in regards to special use valuation.  This relates to how much you can reduce your estate value for farmland (or other business real estate).  For most farmers that own a fair amount of farmland may qualify for this valuation method.  However, as discussed in previous posts, there are many requirements that must be met and you may decide not to use it.

For 2012, the maximum amount you could reduce your estate by was $1,040,000 up from $1,020,000 in 2011.  For 2013, this amount has increased to $1,070,000.

With the schedule reduction in the lifetime exclusion to $1 million beginning in 2013 (assuming Congress does not change it), the use of this special method to value farm property may increase dramatically.

Paul Neiffer, CPA

My wife and I are down in San Jose del Cabo on vacation this week and yesterday we drove from San Jose to Todas Santos on the Pacific Ocean up to La Paz and then back to San Jose on Highway 1. The key thing that I noticed in the drive was the amount of land being farmed or perhaps I should say the lack of land being farmed.

In many areas we would see a small acreage in vegetables, but there appeared to be an abundant amount of land available to be tilled and farmed. It could be due to a lack of water but I know in my area all of this land would be farmed if there was enough water.  I just wonder how much more land is available around the world in areas like this such as Africa.

We will need to find out in the next 30 years since there will be another 2 billion plus mouths to feed.

For those interested so far my wife has put up with me and has no plans on shipping me home early.

The Kansas City Federal Reserve just released an issue of their Main Street Economist report that summarized their 2012 Agricultural Symposium held in July.  We had previously done a quick post on this, but the latest issue does an extremely good job of summarizing the data presented at the Symposium.

History does seem to repeat itself and based on the data from the symposium, there is a very good chance that at some point, the farm boom will correct itself.  Most likely it will happen to the larger more leveraged farmers and perhaps livestock operators who have had several bad profit years.  Although most farmers have record liquidity now, there are more farmers (as a percentage) that are highly leveraged than there were in the early 1980s right before the correction to that boom.

The confluence of record low interest rates and high cash rents have led to the current increase in farmland values, however, the increase in these values is increasing at a higher rate than cash rents.  This may not be sustainable.

I would highly recommend reading the six page report.

The Social Security Administration just announced the 2013 changes for items related to inflation adjustments.

The Cost-of-Living Adjustment for 2013 will be 1.7%.  This means that social security recipients will receive a 1.7% raise beginning in January.

The wage base that is subject to FICA taxes will increase from $110,100 to $113,700.  Therefore, the maximum amount of FICA tax will be $7,049.40 for the employee and employer or $14,098.80 combined.

A quarter of coverage will be based upon $1,160 of earnings.

People who retire at less than full retirement age will be allowed to earn $15,120 per year ($1,260 per month) up from $14,640 in 2012.  $1 is withheld for every $2 in earnings above the limit.

In the year of attaining full retirement, the amount increases to $3,340 per month for each month before retirement age that they can earn.  Once they reach full retirement, they can have unlimited earnings without penalty.

Remember that the Medicare surtax on earnings in excess of $200/$250,000 per year will apply beginning January 1, 2013.  Therefore, the Medicare tax on earnings in excess of those amounts will be 3.8% instead of the current 2.9% combined rate.

Paul Neiffer, CPA

For most farmers, their tax season usually ends on March 1 of each tax year since that is when they usually file their income tax returns.  However, for the rest of us, our normal due date is April 15, but many of our clients get an extension until October 15.

These clients are usually our “procrastinators” and it can get very stressful to get these returns all down by October 15 of each year.  As usual, I still have a few stragglers that for some reason cannot find all of their information or get it to me.  I will deal with those after today but for 99.9% of my clients, we are done with another tax season.

Now it is time for us to do our year-end tax planning and if you have never done this before, contact your tax advisor since planning now can save you taxes later!

Paul Neiffer, CPA

The USDA report that came out this morning appeared to have a bullish bias to it.  Corn and Beans were up at least 20 cents and wheat was not too far behind.

As of today prices, it appears the average corn price for the month of October for the harvest crop pricing is about $7.50 based upon my unscientific averaging of the highs and lows for corn prices each day this month.  Bean prices are slightly lower than $15.50.  These prices are about $2 and $3 per bushel higher than the initial spring price.

I believe that corn prices should hold close to the average and bean prices may trend down a little bit, but the current average prices should not be too far off.

For those who are interested, please e-mail me your guess on the final average corn and bean price for the full month of October.

I will guess that corn will end up at $7.55 and beans will end up at $15.30.  Let’s find out who can be the closest.  Please let me know in your email if you want me to share your name if you end up winning.  I hope to get more than one entry.

Paul Neiffer, CPA

Bill Gross is the lead investment manager for PIMCO which is probably the largest Bond Fund company is the US or the world.  Every month, he writes an Investment Outlook letter to their investors and this month’s letter was entitled “Damages“. 

In the letter, he recaps the countries whose deficit is large as a percentage of their GDP and those who are small.  It is probably not surprising that Greece, Japan, Spain have large deficits, however, the US deficit as a percent of GDP is actually larger than any of the countries other than Japan.

The lesser developed countries such as China, Russia, etc. are much lower and those countries such as Germany and Canada who have gotten their fiscal house in order are much lower too.

The final couple of paragraphs deal with the current total US deficit of $16 Trillion, however, if you add the present value of all of the benefits owed due to Social Security, the deficit becomes closer to $76 Trillion.  Now payroll taxes will cover much of that, but it is interesting to see that the US may not be much better than the PIGS (Portugal, Italy, Greece and Spain) countries.

Until about two years ago, farmers could have been in a battle with the IRS concerning whether a repair was really a repair or an asset that needed to be depreciated.  Beginning in late 2010 and through 2011, 100% bonus depreciation applied for any new purchase including what might have been classified as a repair by the farmer and an asset by the IRS.  This led to most farmers not caring if a repair was a repair or not since in either case it was fully deductible.

Now, for 2012, we only have 50% bonus depreciation and Section 179 is limited to $139,000, so I would expect there to be a lot more repairs by farmers.  Some of the repair rules have been loosened up and if you think you might need more “repairs” this year, make sure to review this with your tax advisor to make sure the repair is really a repair, otherwise the IRS may surprise you later on and classify it as an asset depreciable over 7 years or more.  That can be costly.

This is also another area where proper documentation can be helpful.  By documenting what was repaired and why, etc. you are more likely to withstand an IRS audit  than having the wrong or no documentation.

Paul Neiffer, CPA