DS-Lancastcr Farming Saturday, Dacambar 6,1986
Brockett’s Ag Advice
Kr ' /h By John E. Brockett
Farm Management Agent
Lewistown Extension Office
Changes In The 1986 Tax Law
The 1986 tax law will have an
effect on everyone in this country
plus a few from other lands. No one
from a newborn child to the oldest
American will escape. There are
good aspects as well as bad parts
to the new law for farmers. One
potentially good affect for farming
in general will be to take farming
out of the “tax-shelter” category.
Even this has somewhat mixed
blessings. The worst effect the new
law has for everyone is that filing
tax returns will *be more com
plicated than ever. It may become
especially complicated for farm
ers if the new rule on capitalizing
pre-productive expenses is in
terpreted rigidly. In the next few
columns, I will attempt to interpret
the parts of the new law that affect
the majority of farmers.
Items to be Eliminated
1. Investment tax credit is
essentially a dead issue for now.
There will be no new investment
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credit for anything purchased
after Dec. 31, 1985. This is one of
the changes that takes effect in
1986. Before 1961 there was no
investment credit. For a period of
time in 1969 and 1970 there was no
investment credit. Until 1975 in
vestment credit was 7 percent not
10 percent. So do not consider it as
dead for ever. It may come back in
during the next tax law change or
be phased in as a technical
correction. Do not plan on it
through 1988.
2. The long-term capital gains 60
percent exemption from federal
income tax was also eliminated.
The effective date is Jan. 1, 1987.
This includes the income from
installment sales even if those
sales were from a previous year.
Interestingly enough the
framework for the capital gains
exclusion was left intact so it could
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be brought back in at some uiit m
the future.
3. Land clearing expenses are no
longer deductible as of Jan. 1,1987.
4. Charitable contributions will
not be deductible by non-itemizing
taxpayers after 1986.
5. State sales taxes will no longer
be deductible after this year by
anyone.
6. Interest that is considered
personal, other than mortgage
interest on two homes, will be
phased out as a deductible item
starting in 1987. Personal interest
would include interest on a per
sonal car, credit card interest,
interest on an IRS bill, interest on
an insurance loan where the
money was borrowed for personal
items, interest on personal loans,
and interest on educational loans.
7. The two-eamer deduction will
be eliminated for now. As with the
investment credit, there may be
enough “back home” support for
this one that it could come back in
later.
8. Income averaging will no
longer be available after 1986.
9. Double exemptions for those
over 65 or blind have been
eliminated. That group of people
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deduction to partly compensate for
the loss. Since our population is
gradually getting older this is
another elimination that could
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10. The $lOO dividend exclusion
from tax has been terminated. It
was more valuable for the retired
person than for most farm
families.
Children May Be
Big Losers
Dependent children face a rather
complicated situation. There will
be a lot of children who will have to
start filing taxes under the new
law.
1. Dependents will not be able to
use their own personal exemption
if they are eligible to be claimed on
someone else’s return. The im
plications are serious for several
reasons, (a) The past law said that
the standard deduction could not
be used to offset unearned income
such as interest - fortunately the
new law did show a little mercy
and allow up to $5OO of the standard
deduction to offset unearned in
come. (b) Under the previous law,
the personal exemption could be
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used to offset unearned income and
earned income - since the new law
eliminates the personal exemption
for dependents, there will only be
the standard deduction to offset
both with a limit of $5OO on
unearned income. Example: For
1986, a child would be able to have
up to $3560 of non-taxable income
as long as the unearned portion
was $lOBO or less. For 1987, the
amount of income that a child
could receive without paying taxes
will be $2540 as long as the
unearned portion was $5OO or less.
2. After the 1987 tax season,
taxpayers will have to record on
their returns the TIN (social
security number) of all dependents
over the age of 5. Furthermore,
children taxpayers will have to
report their parents’ TIN on their
returns. 1984 may be coming late.
Dependents Other
Ilian Children
The rules that apply to children
will evidently also apply to other
dependents such as elderly
parents. People with dependent
parents should re-examine their
parents’ tax status in light of the
new law.