(Continued from Page Al)
Investment Credit
One of the most important items
cut from the current tax law is
investment credit, noted Donald
Hummel, director of operations
and training with Pennsylvania
Farmer’s Association’s farm
management.
“Both 1986 and 1987 will be dif
ficult tax years for Pennsylvania
farmers because of the loss of
investment credit,” Jenkins
reported. “As the tax proposal now
stands, investment credit is
repealed effective Jan. 1, 1986.
Thus, investments made during
the current tax year will not
provide tax benefit from in
vestment credit,” he said.
Farmers who have carry-over
investment credit from 1985, if not
used in 1986 or 1907, will loss 35
percent of the credit. The carry
over credit will decrease at a rate
of 17.5 percent for 1906 and 1987,
Hummel said. He suggested ac
celerating farm income over the
next two years to prevent the loss
of the carry-over credit for any
farmer with a substantial amount
of investment credit.
Without tfie investment credit
incentive, farmers will not be
encouraged to buy equipment to
reduce taxes, Hummel said. This
loss should help some farmers
reduce their debt to a manageable
level, he noted as a positive point to
the removal of the tax provision.
“Investment credit has been an
important source of tax relief for a
majority of Pennsylvania farmers.
In 1984, the state’s commercial
farmers paid an average of $473
less in income taxes because of
investment credit,” Jenkins
reported.
Capital Gains
Beginning in 1987, the capital
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gains provision of the current tax
bill will be eliminated, Jenkins
said.
This deletion will cause “the sale
of assets to be treated as normal
income,” James Mulhern of the
National Milk Producers
Federation said.
“The loss of this tax benefit will
be particularly harmful to dairy
farmers and livestock producers
who have significant income from
sale of cull or breeding animals,”
Jenkins wrote. Considered in
ferior, culls have an income tax
level of zero under the present
regulations, he added.
Under current rules, “tax is only
collected on 40 percent of the gain
from the sale of such assets,”
Hummel said. The new proposals
tax the full gain of these assets, he
continued.
“On the typical Pennsylvania
dairy farm, this one change Ml
increase taxable income by
several thousand dollars," Jenkins
said.
Income Averaging
“The Ipse of income averaging
may not be as important to a dairy
farmer as to other producers
whose income is more volatile,”
Mulhern said.
Yet, “income averaging was one
of the major sources of tax relief to
participants in the buyout
program,” Jenkins wrote.
This provision permits farmers
to average three previous poor
years with an unusually high in
come year, thereby reducing the
amount of taxable income,
Hummel explained.
The new plan reduces individual
tax rates from 14 levels ranging
from 11 to 50 percent to two levels
ranging from 15 to 28 percent.
Following a two-year phase-in
period, the individual can expect to
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pay less taxes in 1988 than in 1986,
Hummel said.
However, Jenkins reports that
farmers will not benefit from this
proposal as much as the general
public. Under current law the
average farmer pays taxes below
the IS percent level, the lowest rate
of the proposed law. A spring Penn
State study showed 2298 com
mercial farmers paid an average
effective tax rate of 12.9 percent.
Other Changes
In 1988 the personal exemption
deduction for each dependent
increases from $l,OBO to $2,000,
Hummel said. Standard deduc
tions under the current law stand
at; single, $2,480; joint, $3,670; and
household head, $2,480. These
deductions will rise to $3,000, $5,000
and $4,400, respectively, under the
fully phased-in plan, he added.
Fast depreciation using the
Accelerated Cost Recovery
System will be eliminated on Jan.
1,1987, Hummel said.
Slowing depreciation on farm
assets extends the depreciation
period and moves the accounting
method closer to the straight-line
method, Mulhem said.
The straight-line method of
computing the depreciation
deduction subtracts the estimated
salvage value from .the cost. The
farmer deducts this value, in equal
amounts, over the estimated useful
life of the property.
Items such as machinery and
farm buildings will be affected the
most by the depreciation change,
Jenkins reported.
Prepayment of expenses
provision of the new tax bill per
mits payment of 50 percent of each
accounting expense, Hummel said.
To use this provision, farmers
must receive 50 percent or more of
their income from farming and the
prepayment must be made for
good business reasons, such as
obtaining a better price.
Self-employed farmers will be
permitted to deduct 25 percent of
their health insurance under the
new tax legislation, Mulhern said.
Commercial farmers not
covered by a retirement plan will
be able to retain or begin In
dividual Retirement Account
programs, Jenkins reported.
“As the proposal stands now,
farm couples with no off-farm
employment would be permitted to
make contributions of up to |2,250
and deduct that amount from their
taxable income,” he added. A
farmer in the 15 percent bracket
will reduce his taxes by over $3OO
with the maximum IRA con
tribution. Those in the 28 percent
bracket will realize a tax reduction
over |6OO for the same con
tribution, Jenkins explained.
“Deductions for soil and water
conservation and land clearing will
be severely restricted after Jan. 1,
1987,” he said.
Taxpayers Mo file a Joint tax
return will lose the $2OO dividends
exclusion in 1987, Jenkins said.
“The loss of the deduction
probably affects farmers
disproportionately because such a
large percent of the farm
population receives dividends as a
part of their farm business ac
tivity,” he said.
The tax bill also influences
children of farm families. They
will pay their parent’s tax rate on
any interest or investment income
they receive over $l,OOO, Jenkins
said.
“Under the new law, children
who are claimed as dependents on
the parent’s return will not be
permitted to claim a personal
exemption for themselves on their
own return. To further complicate
the procedure for claiming
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dependents, the taxpayer will be
required to list on the tax return
the social security number of any
dependent who is more than 5
years old,” he continued.
The tax bill removed tax shelters
by requiring “farm investors to be
active, material participants in
their farm operations pot just
financially at risk as is currently in
the law in order to deduct farm
losses from non-farm income,”
according to an article in the
Philadelphia Inquirer.
However, “enterprising in
vestors can still find tax breaks,”
an article in Newsweek said. The
new tax plan considers tax shelters
passive investments and losses can
only be deducted against income
from other passive investments.
Newsweek lists cattle feeding and
horse breeding as two of the 10 best
passive investments available.
Tax Workshops
Expected changes in the tax
code increase the importance of
tax planning. Two three-day
workshops are planned to aid
farmers in understanding the new
tax code as wdl as expanding their
tax knowledge. Tax experts, in
cluding Jenkins and Cooper, will
conduct the Federal and State
Income Tax Preparation
Workshop in Meadville on Oct. 21
to 23 and in Lancaster on Oct. 28 to
30.
The course costs $9O if
registration and payment occur
before Oct. 1. After this date the
fee increases to $lOO. For more
information contact Larry Jenkins
or Jesse Cooper at 202 Armsby
Building, The Penn State
University, University Park, PA
16802, or call 814-865-7656. For
information on the Lancaster
meeting contact Jay Irwin at the
Lancaster County Extension Office
at 717-394-6851.