Changes made by Congress last year could save you a bundle on your 1998 taxes.
A new USDA study shows that the Taxpayer Relief Act of 1997 will save farmers more than $1.6 billion per year in federal income taxes and more than $150 million in federal estate taxes.
The greatest tax reduction for farmers is in capital gains. The tax rate declines from 28% to 20% for individuals in most tax brackets (from 15% to 10% for taxpayers in the 15% bracket), with lower rates available in the future for assets held at least five years.
Couples can exclude up to $500,000 of the gain realized on the sale of a principal residence.
Farmers' taxes should be reduced by $725 million a year as a result, according to the study.
Farmers again can use deferred payment contracts without being subject to the alternative minimum tax. Small farm corporations are exempted from the tax. That saves each about $150 a year.
For a limited time, farmers can use income averaging to shift farm income into the three preceding years, reducing taxes by about $50 million a year overall.
Farmers can defer the gain on the sale of livestock due to floods and other weather-related conditions, reducing taxes nationwide by about $2 million a year.
Large family farm corporations no longer can establish suspense accounts when required to change from cash to accrual accounting. Existing accounts must be recognized in income over 20 years, increasing farm corporations' taxes by about $35 million a year.
Self-employed taxpayers, including farmers, may deduct more of their health insurance premiums. The deduction increases from 40% in 1997 to 100% by 2006. When fully phased in, farmers' after-tax cost of health insurance declines by about 10% or more than $135 million a year.
The new law also expands the availability of individual retirement accounts and provides penalty-free distributions for education and first-time home buyers.
A $500 tax credit for each dependent child under age 17 is allowed, and most taxpayers can use two new non-refundable tax credits for college expenses.
Larger farms, and larger estates in general, now can be transferred tax-free under the estate tax changes made by the new law. The law increases the unified credit from $600,000 to $1 million by 2006.
The expanded unified credit, combined with a new exclusion for continuing farms and other family businesses, shields estates valued at up to $1.3 million starting in 1998. That should force a decline in estate taxes by about $150 million a year for farmers.
Conservation easements come under a new estate tax exclusion under the law as well. The exclusion is based on the value of the land subject to the easement.