Depending on whether it’s a higher- or lower-income year, farmers or ranchers may consider altering their retirement plans or putting family members on the payroll to improve tax and income situations, says Tina Barrett, executive director, Nebraska Farm Business Inc.
NFB is an independent company spun off from University of Nebraska Extension. It now has private clients who need help with taxes, estate planning and financial analysis.
“In a year like this, there are things you can do to reduce taxes owed,” she says. “If money has been put into a traditional retirement plan in years of high profit, you can’t remove it without penalties — but perhaps some of that money can be moved to a Roth IRA, which allows the money to grow tax-free. The amount that is rolled into a Roth IRA is taxable income but could offset losses in a low-income year.”
When cattle or crop prices turn around and tax burdens increase, it may be time to pay family members for their labor. “You must pay a reasonable wage for the work done,” Barrett says.
“For example, you can't pay a 2-year-old $10,000 per year to help around the farm. But many kids do considerable work around the operation and can be compensated. This expense reduces your farm income and could be tax-free if their total income is under the standard deduction.
“This also gives the kids earned income that they could contribute to a Roth IRA. These funds can be used to pay for college expenses but are not looked at for federal financial aid purposes,” she says.
Of course, many spouses do much of the farm or ranch work. “Paying your spouse is another option to consider,” Barrett says. “While this doesn't create the tax savings that paying your children can, it may mean we can create an employee relationship that you can provide with benefits.”
There can be tax questions if a farm or ranch has Affordable Care Act, or “Obamacare,” health insurance coverage. “So it’s important to consult a tax professional about your unique situation before implementing any of these plans,” Barrett says.
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