Federal and/or state income taxes are another "tax issue" that affects farm families, including the amount of earned income that is available to set aside for retirement. This module is divided into two sections: general tax reduction strategies available to all U.S. taxpayers and tax reduction strategies that are unique to farmers and self-employed workers:
General Tax Reduction Strategies
- Contribute as much as possible to a tax-deferred employer 401(k), 403(b) or 457 plan if someone in the family has off-farm income. The maximum allowable deposit in 2024 is $23,000 and $30,500 for workers age 50 and over with an additional $7,500 catch-up contribution.
- Contribute to a Traditional and/or Roth IRA; up to $7,000; $8,000 if age 50 and over (2024).
- Hold assets for more than a year to take advantage of the 0%,15%, and 20% tax rates (depending on income) on long-term capital gains. Consider purchasing municipal bonds or muni bond funds. Earnings are free from federal income tax and also escape state income tax if issued by a taxpayer’s state of residence.
- Consider purchasing municipal bonds or muni bond funds. Earnings are free from federal income tax and also escape state income tax if issued by a taxpayer's state of residence.
- "Bunch up" deductions (e.g., charitable contributions), if their combined total is close to the standard deduction ($14,600 for singles and $29,200 for couples in 2024). This way you can itemize deductions, say, every second or third year and save more on taxes than if you didn't itemize.
Tax Reduction Strategies for Farmers and Self-Employed Workers
- Take advantage of the Section 179 expensing election which allows business owners to claim an immediate tax write-off for qualified property rather than depreciating these items over a longer period of time. Qualified property includes machinery and equipment, business vehicles, computers, office furniture, land, and buildings. The cost of qualified property is treated as an expense instead of a depreciating asset, which delays the tax benefits of a business purchase. For more information about Section 179 deductions, review this website: www.section179.org/section_179_faqs/.
- Project the current and following year's income and expenses. Then, assuming you use cash-basis accounting, consult a tax advisor to determine the best timing for delivery and sale of commodities and/or prepayment of farm expenses to pay the least amount of tax possible.
- Use farm income averaging to average the current year's taxable income with income from previous years' operations if it can lower your income liability. Typically, this is done when a farmer has a higher income in the current tax year than in previous (base) years and averaging results in a lower taxable income. Income averaging requires the use of a tax form called Schedule J which treats the election year (e.g., 2024) income as if it had been earned over the preceding three base years (e.g., 2021 to 2023) and taxed at their respective tax rates.