Taxlink by Andy Biebl

For too many, planning means a focus on next week's activities. However, when it comes to income taxes, the perspective needs to be long term. Today's tax rate system is insanely complex (by design, but that's a topic for another day). The hazard is not merely a more steeply graduated rate system; it's also the layering of additional taxes (the 3.8% Obamacare tax and the Alternative Minimum Tax) and the hidden phase-outs (itemized deductions, personal exemptions) that complicate the rates. Temporary tax provisions (Section 179 and bonus depreciation) add to the complexity.

TAX PLANNING PROJECTIONS

During the November or December year-end tax planning projection, it is all about the rates. How much income can be brought home at a reasonable marginal tax rate? With the rate system as complex as it is, that means running multiple scenarios to accurately capture the cost of increased income or benefit of accelerating deductions. A snapshot won't do; you need a moving picture.

PUSHING IT BACK

Income averaging adds a powerful tool available to farmers only. Current income can electively be spread back and taxed at the marginal rates applicable to the last three years. But what's often overlooked is the ability to first better position those three base years by amending one or more via an earlier income averaging election. Income averaging is a powerful tool, but it takes sharp analysis to optimize it.

PUSHING IT FORWARD

Most cash-method ag producers are adept at building an annual tax deferral by deferring commodity sales and accelerating expenses. That deferral tends to increase in most good years, and by retirement there's a large amount of deferred income and no remaining expenses. Five years or so ahead of retirement is the time to start planning. One underutilized strategy is a cash balance defined benefit retirement plan. If annual farm earned income is in excess of about $270,000, these plans can be maximized for an older producer to push significant pre-tax dollars into a qualified plan. A $100,000 or $200,000 pre-tax annual funding isn't out of the question. But this takes foresight and a willingness to engage a retirement plan design specialist.

Another solid technique for a producer nearing retirement is to create a split-interest Charitable Remainder Annuity Trust (CRAT) to provide longer term deferral. A CRAT receives the unsold grain from the farmer, sells the grain tax-free due to its charitable status, and then pays back a stream of income to that farmer for up to 20 years. At the end of the income payback, the residual must go to one or more designated charities. These trusts can be designed to pay up to 90% of the present value back to the donor, in exchange for at least a 10% projected residual to the charity (charitable giving for the uncharitable!). Generally, we can save over 10% in taxes by spreading out the income, making it an economic winner for both the farmer and the local charities, with only Uncle Sam coming out short.

EDITOR'S NOTE: Andy Biebl is a nationally recognized CPA and tax principal who specializes in agriculture with CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minnesota. He writes tax columns for DTN and its sister publication, The Progressive Farmer magazine. To submit questions for future columns, or to find out about DTN's retirement tax workshops, email AskAndy@dtn.com. Subscribers can always find Biebl's columns in Town Hall, on the Farm Business page or online using the Search feature under News.

(MZT/CZ)

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