The recently enacted Tax Cuts and Jobs Act is a sweeping tax package. Here is a look at some elements of the new law that will affect farm families. Unless otherwise noted, the changes are effective for tax years 2018 through 2025.
Individual Tax Impacts
• Standard deduction. The new law increases the standard deduction to $24,000 for married taxpayers filing jointly, $18,000 for heads of household and $12,000 for single and married but filing separately taxpayers.
• Personal exemptions. The new law suspends the deduction for personal exemptions. Starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
• Child tax credit. The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000.
• Medical expenses. For 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income. Previously, the adjusted gross income “floor” was 10 percent.
• Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
Business Tax Impacts
• Net operating loss deduction. In general, under the new law, NOLs arising in tax year ending after 2017 carry forward, not back.
However, certain farming losses are eligible for a two-year carry back. These NOLs carry forward indefinitely, rather than expiring after 20 years.
• Domestic production activities deduction. The new law repeals the DPAD for tax years beginning after 2017.
• Increased code section 179 expensing. The new law increases the maximum expense amount to $1 million. The expense indexes for inflation after 2018.
• Bonus depreciation. Under the new law, a 100 percent first-year deduction is allowed for qualified new and used property acquired and placed into service after Sept. 27, 2017, and before 2023.
After 2023, the 100 percent allowance phases down.
• Depreciation of farming equipment and machinery. Under the new law, the cost recovery period for new farming equipment and machinery moves to five years from seven years. Used farm equipment and machinery remains at seven years.
Additionally, in general, the 200 percent declining balance method may be used in place of the 150 percent declining balance method that was required under previous law.
• Like-kind exchange treatment. Under the new law, the rule allowing the deferral of gains on like-kind exchanges of property held for use in a taxpayer’s trade or business is limited to cover only like-kind exchanges of real property. Personal property is no longer applicable for a like-kind exchange.
• New deduction for pass-through income. The new law provides a 20 percent deduction for “qualified business income,” defined as income from a trade or business. The deduction reduces taxable income, but not adjusted gross income. The deduction applies (subject to further limitations) only if taxable income is above $157,500 for single taxpayers ($315,000 for married couples filing jointly).
Important tax considerations in years with farm losses:
• The “Optional Method” for farmers provides self-employed persons with little or no income (likely in 2018 with low milk and crop prices) the option to pay a small amount of self-employment tax for the tax year.
It is important to show earnings to receive credit from Social Security toward earning requirements to collect retirement benefits and disability in the future.
In many cases for people with children, the taxpayers can use the earned income credit and additional child tax credits to offset the self-employment tax. To qualify for these credits, there must be earnings, which the “optional method” provides farmers.
• Farm income averaging provides benefits to farmers in loss years as well as profit years. It is unfortunate, but farms will be selling cows and equipment, and exiting the dairy business this year.
Selling those assets will trigger ordinary and capital gains. In simple terms, with the last two to three years prior also not too profitable, there is an opportunity to use farm income averaging to spread the gains on cows and equipment back over three years prior and take advantage of filling up some lower tax brackets.
During a year of a herd and farm equipment dispersal, there are many tax considerations that will require a tax professional. Farm income averaging might be a good tool to consider alleviating some tax liability.
This is a glimpse of the various new or changed provisions under the tax law. Consult a tax professional or join AgChoice Oct. 2 for a free webinar to learn more about the changes. RSVP at agchoice.com/2018taxlawchanges.