Year-end tax planning for agricultural producers and general taxpayers must be done by "what is known" regarding current federal tax code, even though there’s uncertainty about extending certain tax cuts, according to Texas AgriLife Extension Service economists.
Jose Pena, AgriLife Extension economist-management at the Texas AgriLife Research and Extension Center in Uvalde, said it’s currently unknown if Congress will extend tax cuts that are part of the 2001 Economic Growth and Tax Relief Reconciliation Act.
If the tax cuts imposed under the Bush administration are not extended, all tax rates will rise for all individual taxpayers, including those subject to the lowest tax rates, he said.
"Year-end tax planning appears confusing as the political climate in Congress changes and Congress remains in a stalemate over extending the tax cuts, which are scheduled to expire Dec. 31," Pena said.
A hot-button item among agriculture producers is the estate tax, which was repealed in 2010. Under current law, there is no federal estate tax, but heirs who sell appreciated assets may face capital gains taxes.
"In 2011, the estate tax is set to return with a $1 million exemption and a top rate of 55 percent on the largest estates," Pena said. "But it appears some congressmen are pondering a $3.5 million exemption with a 45 percent top rate, which over the years would evolve into a $5 million exemption and a maximum tax rate of 35 percent. It appears, however, that the estate tax is not going to disappear."
Meanwhile, he said, agricultural producers and small business owners may be able to take advantage of some extended tax cuts as part of the Small Business Jobs Act of 2010 signed into law in September.
"This extended some of the business tax cuts which had expired in 2009," Pena noted.
He said some of extensions and allowances from which agricultural producers may derive a tax benefit include:
• Extending and increasing the Section 179 expensing option for depreciable property used in business (computers, office furniture, equipment, vehicles or other tangible business property) to a maximum of $500,000 for tax years 2010 and 2011 only.
• Extending the 50 percent bonus depreciation for 2010, which was set to expire at the end of 2009 for new property as long as the property is placed into service before Jan. 1, 2011.
• Allowing the deduction of cell phone business use without documentation.
• Temporarily increasing the amount of start-up expenditures that small businesses can deduct from their taxes in 2010 from $5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures).
• Allowing a deduction for the cost of small-business health insurance premiums in calculating self-employment taxes.
Increased Section 179 expensing option
The increased Section 179 expensing option and the 50 percent depreciation provision can give agricultural producers a great ability to manage income and Social Security taxes for 2010, said Dr. Wayne Hayenga, Texas A&M University professor emeritus and AgriLife Extension agricultural economist.
"Some producers who bought equipment in 2010 may be able to almost eliminate taxable income for the year," Hayenga said. “And cash-basis producers can use expensing to avoid tax on income carried forward from prior years. They can also use it to avoid income and Social Security taxes on much of their 2010 income."
He added that current discussions in Congress regarding cutting the tax rate for 2011 also likely will have an impact on agricultural producers.
"It probably wouldn’t make sense for producers to lower their taxable income, missing out on otherwise allowable personal exemptions and deductions," Hayenga said. “Also, some producers may want to report sufficient income to qualify for an earned-income credit."
Pena said tax breaks that expired at the end of 2009 included deduction for classroom expenses for educators; tuition and fees deduction for college; additional standard deduction for property taxes; additional standard deduction or itemized deduction for sales taxes paid on a new vehicle; itemized deductions for state and local sales taxes in lieu of state income taxes; tax-free exclusion of the first $2,400 in unemployment benefits; and tax-free exclusion of IRA funds donated directly to charity.
"In addition, required IRA payments from IRA plans resume this year," Pena said. "Congress also did not extend last year’s waiver of required IRA distributions for those age 70 ½ or older."
He added that the $1,000 child tax credit available through 2010 as part of the Emergency Economic Stabilization Act of 2008 and the 2009 stimulus package will be reduced to $500 in 2011.
"And cost-of-energy efficiency improvements may be entitled to a tax credit of 30 percent of the purchase price up to a maximum credit of $1,500," he said. "But that credit will be offset by the alternative minimum tax in 2010 unless Congress changes the rules."