Kelly Bullis: Income averaging for farmers

Tax advice (and others)

Kelly bullis

How many of you remember when you were a child that you dreamed of being a farmer or a rancher? What!? Am I the only one who has dreamed of driving tractors to plant and harvest things? Am I the only one who thinks it would be great to be a REAL cowboy? Haven’t you watched TV shows like Bonanza or Little House on the Prairie and thought to yourself, “Hey, that would be a good life! “?
Well, for you REAL farmers and ranchers, Congress loves to offer special tax breaks and it surprises me how little known or used it is. Income averaging.
Now in the “good old days” (for my grandchildren, that is, when I was a kid), income averaging was for all US taxpayers. Basically, the assumption was that a taxpayer can have a very high “special circumstances” year of income that puts him in a very high tax bracket… many thought, unfairly. The solution was to take the average taxable income over a 10-year period and determine which is the highest tax bracket for that, then apply that “average income tax bracket” to the year. current high income “special circumstances”. This generally resulted in a much lower tax rate. Of course, if you normally had a high income almost every year, then 10-year income averaging didn’t work for you.
Today, the income averaging option is reserved for farmers, ranchers, etc.
So if a skilled farmer / rancher has a bumper year, say they’ve earned enough in the current year to make up for the last three years of drought, they can now average the four years together and pay much less tax.
Here’s an example: Ol MacDonald had a farm. In year 1, his net income was a loss of $ 50,000. No problem, his banker lent enough to plant the second year. At the end of the second year, Ol MacDonald lost an additional $ 50,000. Once again, his banker loaned him the money to replant. In the third year, he lost an additional $ 50,000. This time his banker was a little more skeptical of lending him money to plant the fourth year, but being a smart banker knowing that farmers will end up having a good year, he loaned Ol MacDonald enough. .
In the fourth year, Ol MacDonald had a bumper crop year! His net profit was $ 300,000! Without income averaging, Ol MacDonald’s tax would be approximately $ 50,341. Ouch! After paying his friendly banker $ 170,000 (interest included), that leaves him only $ 79,600 in profit to show for four years of hard work! If Ol MacDonald averaged his last three years plus the fourth year together, his tax would be $ 40,600. That’s an additional tax savings of $ 10,000 + for Ol MacDonald!
Now Ol MacDonald has enough to plant for next year and has put some aside for his retirement. After all, he’s not very good at singing, all he says is… well, you know the song.
Did you hear? Prov 29:19 says: “He who cultivates his land will have much bread, but he who follows frivolity will have enough poverty!”
Kelly Bullis is a Chartered Accountant in Carson City. Contact him at 882-4459. On the web at Also on Facebook.

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