How many of you remember when you were a kid that you dreamed of being a farmer or a rancher? What! Am I the only one who day-dreamed of driving tractors to plant and harvest stuff? Am I the only one who thought it would be great to be a REAL cowboy? Didn’t you watch TV programs like Bonanza or Little House On The Prairie and think, “Hey, that would be a great life!”?
Well, for you REAL farmers and ranchers out there, Congress just loves to handout special tax breaks and one that surprises me to find out how little it is known or used. Income Averaging.
Now in the “good ol days” (for my grandkids, that means when I was a kid), Income Averaging was for all US Tax Payers. Basically, the assumption was that a taxpayer may have a “special circumstance” year of extra high income that bumps them into a really high tax bracket…many thought, unfairly so. The solution was to take the average of taxable income over a 10 year period and figure out what the top tax bracket is for that, then apply that “income averaged tax bracket” to the current “special circumstance” year of high income. This generally resulted in much lower tax. Of course, if you normally had high income almost every year, then 10 year income averaging didn’t work for you.
Today, the Income Averaging option is only for Farmers, Ranchers, etc.
So, if a qualified farmer/rancher has a windfall year, let’s say they earned enough in the current year to make up for the last 3 years of drought. They now get to average all 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 loaned enough to plant in year 2. At the end of year 2, Ol MacDonald lost another $50,000. Once again, his banker loaned him the money to plant again. In year 3, he lost another $50,000. This time his banker was a little more skeptical on loaning him money to plant in year 4, but being a smart banker, knowing that farmers eventually have a good year, he loaned Ol MacDonald enough. In year 4, Ol MacDonald had a bumper crop year! His net profit was $300,000! Without income averaging, Ol MacDonald’s tax would be about $50,341. Ouch! After paying off his friendly banker $170,000 (includes interest), that leaves him with only $79,600 profit to show for 4 years of HARD work! If Ol MacDonald averaged his last three years plus year 4 together, his tax would be $40,600. That’s an extra $10,000+ tax savings to Ol MacDonald!!
Now Ol MacDonald has enough to plant for the next year, and put away a little bit for his retirement. After all, he isn’t very good at singing, all he ever says is…well you know the song.
Did you hear? Prov 29:19 says, “He who tills his land will have plenty of bread, but he who follows frivolity will have poverty enough!”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.