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The fiscal-cliff negotiations that took place at the end of 2012 created an opportunity for a number of changes in farm tax rules and regulations, specifically the filing date for annual income tax returns. Farms have been given an extension on 2012 farm-income tax returns from the normal March 1, 2013, deadline. If estimates have not been made, farmers can file without penalty until April 15, 2013.
Farms that elect to delay filing will need to include Form 2110F with their tax returns. Form 2110F is a waiver included in the American Taxpayer Relief Act (ATRA) enactment. To qualify, at least two-thirds of the taxpayer’s gross income in either 2011 or 2012 must be from farming.
Here are some additional changes that might impact farm business plans in 2013:
- The 179 expense deduction election for 2013 was set at $500,000. This allowance provides an option for accelerated depreciation on new or used machinery or equipment purchases for the year of the purchase. (There is a dollar-for-dollar phase-out for farms purchasing more than $2 million of depreciable capital assets during 2013.)
- In addition, a farm has the option to take a 50-percent bonus depreciation of adjusted basis after 179 expensing. This option only applies to new property placed in service during 2013 that has a depreciable recovery period of 20 years or less. This option is scheduled to expire at the end of 2013.
- Long-term capital gains and qualified dividend income now has a 20-percent tax rate for individuals in the higher tax brackets. Capital gains are still taxed at a 0-percent rate for individuals in the 10- or 15-percent tax brackets.
- Those in the middle tax brackets (between the 15- and 39.6-percent) will pay 15-percent capital gains taxes.
- Beginning in tax year 2013 (generally for tax returns filed in 2014), a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates—10, 15, 25, 28, 33 and 35 percent—remain the same as in prior years. The guidance contains the taxable income thresholds for each of the marginal rates.
- The annual gift-tax exclusion that can be given to any person without any reporting requirements is increased to $14,000.
- A Return to Itemized Deduction Limits for higher-income farmers brings this limit on itemized deductions back into effect for higher-income farmers for 2013 and subsequent years. The limitation affects farmers with adjusted gross income over a threshold amount ($250,000 for farmers filing single or $300,000 for farmers filing jointly). Generally, farmers affected by this rule will have their itemized deductions reduced by 3 percent of the amount by which AGI exceeds the threshold amount. The reduction is subject to a cap that is part of the formula triggered if the farmer’s income is high enough.
- Two new Medicare taxes are now in place for individual incomes over $200,000 or $250,000 married filing jointly: a 3.8 percent Medicare tax applied to passive income, such as dividends, interest and capital gains. In addition, a new 0.9 percent Medicare tax is in place.
- Alternative Minimum Tax was set at $78,850 for 2012 and with inflation index will be $80,750 for 2013. This represents the income level below which ATM tax should not apply. Having this number in advance should aid farms in planning if they hope to avoid this tax.
- The standard deduction rises to $6,100 ($12,200 for married couples filing jointly), up from $5,950 ($11,900 for married couples filing jointly) for tax year 2012.
- The American Taxpayer Relief Act of 2012 added a limitation for itemized deductions claimed on 2013 returns of individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly).
- The personal exemption rises to $3,900, up from the 2012 exemption of $3,800. However beginning in 2013, the exemption is subject to a phase-out that begins with adjusted gross incomes of $150,000 ($300,000 for married couples filing jointly). It phases out completely at $211,250 ($422,500 for married couples filing jointly.)
- The Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 ($80,800, for married couples filing jointly), set by the American Taxpayer Relief Act of 2012, which indexes future amounts for inflation. The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly).
- The maximum Earned Income Credit amount is $6,044 for taxpayers filing jointly who have three or more qualifying children, up from a total of $5,891 for tax year 2012.
- Estates of decedents who die during 2013 have a basic exclusion amount of $5,250,000, up from a total of $5,120,000 for estates of decedents who died in 2012.
- The amount used to reduce the net unearned income reported on a child’s tax return subject to the “kiddie tax” is $1,000, up from $950 for 2012.
- The foreign earned income exclusion rises to $97,600, up from $95,100 in 2012.
As farms manage more gross income, the need for improved financial accounting systems and increased management of farm income becomes necessary. Michigan State University Extension recommends that farms consider financial management options like the Telfarm Farm Financial management system.
Information on agricultural tax topics can be found in the “Farmers Tax Guide,” publication 225. This publication along with others is available at from the IRS by calling the IRS directly at 800-829-1040 or visiting the IRS website.
—Courtesy Michigan State University Extension
