Farmers Will Pay More Taxes In 1987
(Continued from Page Al)
Tax Rate Changes
The tax reform act will decrease
the number of income tax brackets
from 14 to two. “We’re going to
move from the current 14 bracket
system ranging from about 11 to 38
percent in terms of rates, to a two
rate system,” Jenkins said. The
rate changes will be phased in
gradually, with a five-rate system
in force for 1987.
Next year, married couples
filing a joint return will pay taxes
at the following rates: $0 t 053,000,
11 percent; $3,000 to $28,000, 15
percent; $28,000 to $45,000, 28
percent; $45,000 to $90,000, 35
percent; and over $90,000, 38.5
percent.
The two-rate system will begin in
1988. Married couples earning up
to $29,750 will pay at a 15 percent
rate, while those making over
$29,750 will pay 28 percent.
High income couples making
over $71,900 will be charged a 5
percent add on to remove the effect
of the lower (15 percent) tax
bracket, in effect paying at a rate
of 33 percent. Couples bringing in
more than $142,250 will pay a
second 5 percent add on. “So the
new system is really a three
bracket system,” Jenkins ex
plained.
The abrupt increase in taxes at
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incomes over $29,750 makds it
exceedingly important for farmers
to watch taxable income. “Just a
few extra dollars will push us into
the 28 percent rate,” Jenkins said.
“In the past, we’ve had a rather
gradual phase in of high tax rates.
Now you’re either 15 or 28 or
something higher than 28,” he
said.
In the past, farmers were able to
exclude 60 percent of capital gains
income from taxes. But, after
January of 1987, all capital gains
income will be taxable. “We will
not be permitted to exclude that 60
percent as we have in the past,”
Jenkins said. “In my opinion,
that’s.going to do more damage to
your pocketbook than any other
change in this tax law.”
This change will be sorely felt in
Lancaster County, where about
half of farm income comes from
the sale of breeding livestock.
“Any livestock producer who is
selling a substantial amount of
raised breeding stock is going to
pay more tax with the loss of this
capital gains exclusion,” Jenkins
noted.
The new code includes a special
provision for dairymen in the
buyout program, giving them until
Sept. 1,1987 to sell their cull cows
and still qualify for capital gains
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Jenkins warned farmers to be
more attentive to capital gains
income than they were in the past,
since the additional income could
push regular income into higher
tax brackets. “Try to arrange your
sales so you stay in that (lb per
cent) tax bracket,” he advised.
Investment Credit
The new tax code has repealed
investment credit for property
placed into service after Dec. 31,
1985. However, Jenkins noted, a
special provision for 1987 will
permit farmers with unused in
vestment credit to receive the
smaller of three options: 50 per
cent of unused investment credit,
the total taxes you have paid over a
15 year period beginning the first
year you had unused investment
credit, or $750.
“For many of you, it’s going to
be a gift of $750,” Jenkins said.
“You must get this in 1987 or it is
-forever lost.”
In addition, the amount of in
vestment credit in 1987 must be
reduced by 17.5 percent; after 1987
the amount will be reduced by 35
percent.
For example, if you owe $l,OOO
income tax in 1987 and have $5,000
in unused investment credit, you
can pick up the $750 “gift,”
reducing your carryover credit to
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$4,250. You will still owe $250
($l,OOO - $750), but can apply $250 of
the unused investment credit to tax
owed. However, you still must pay
the first 17.5 percent or $37.50.
Soil and Water Conservation
Prior law permitted farmers to
deduct 25 percent of gross income
from farming for soil and water
conservation expenses. The new
law restricts that deduction in two
ways, Jenkins said.
First, a farmer must have an
SCS plan for his farm before he can
deduct the expense. “Never before
has a conservation plan been
required as a prerequisite to
deducting soil and water con
servation expense,” Jenkins said.
The new law also restricts the
amount that can be deducted to the
smaller of $5,000 or 25 percent of
taxable farm income.
“So the bottom line is this,”
Jenkins said. “I think the
deductions that we will have
available for soil and water con
servation expense in the future will
be significantly smaller than in the
past.”
Preproductive Expense
Under previous law, farmers
could deduct preproductive ex
penses (expenses that occur prior
to the time that the enterprise the
expense is related to begins
producing income) on an annual
basis as they occurred. Under the
new law, farmers will be forced to
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choose from two options.
The first option, Jenkins said, is
to collect all expenses that occur
before the income starts coming in
and depreciate it on a schedule like
a piece of equipment. However,
farmers selecting this option will
be required to keep separate
records of these expenses.
The second, and most likely
more popular option, will be to
continue handling the expenses
exactly as in the past, but at a
slower rate of depreciation. If you
deduct preproductive expenses on
an annual basis, you will be forced
to use a slow method of
depreciation on all depreciable
property placed in service that
year. Depreciation deductions will
be reduced by about 30 to 35 per
cent.
“So, the price we have to pay in
order to avoid the problem of
capitalizing and then depreciating
these expenses is simply a slower
depreciation system,” Jenkins
said.
Farmers will still be able to
continue prepayment for supplies
as long as they are for business
purposes. However, “the new rules
say that we may follow that
practice of making advance
purchases of supplies and so forth,
only as long as we spend less than
50 percent of deductible farm
expenses.”
Depredation
Under the new tax law,
depreciation will occur over a
longer period of time but at an
accelerated rate. “Generally,
we’re adding about two years to
the life of property in terms of
depreciation to use a slightly faster
rate of depreciation,” Jenkins
said.
“The net result,” he continued,
“will be a smaller deduction in the
depreciation that is available each
year.”
The new rule will also double the
amount of depreciation farmers
can expense each year. In the past,
the expensing option permitted a
$5,000 deduction- which has been
increased to $lO,OOO in the new law.
However, farmers will not be
permitted to write off more than
their taxable income. Thus, if total
taxable income is $2,800, the
maximum expense amount is also
$2,800.