February 4, 2002

Specialist Reviews Income Tax Changes for Agricultural Producers

As tax preparation time gets under way, agricultural producers need to be aware of a number of changes in tax regulations.

"Staying up-to-date on these changes will help producers prepare their returns accurately," says North Dakota State University Extension farm management specialist Ron Haugen. Farmers have until March 1 to file their returns without penalty. If they made an estimated tax payment by Jan. 15 they have until April 15 to file.

Items to note for 2001 income tax preparation:

The income tax rates have been decreased for 2001 and will be further reduced in future years.

• The personal exemption amount has increased to $2900.
• The standard deduction has increased to $7600 for married filing jointly and $4550 for singles.
• The 179 expense for 2001 is $24,000. It is scheduled to remain at $24,000 for 2002. One change under consideration by Congress as part of a proposed economic stimulus package is to increase the 179 expense deduction to $35,000. More information will be available if legislation is enacted.
• The mileage rate for 2001 is 34.5 cents per mile, scheduled to go to 36.5 cents per mile in 2002.
• W-2’s can be filed on-line for businesses with fewer than 10 employees. For more information call the Social Security Administration at (888) 772-2970 or visit their Web site at: www.ssa.gov/employer .
• The social security wage base is $80,400, scheduled to be $84,900 in 2002.
• The self-employed health insurance deduction is at 60 percent. It is scheduled to go to 70 percent in 2002.
• The child tax credit has increased from $500 to $600 for each qualifying child under age 17.
• The annual gift exclusion is $10,000. It is scheduled to go to $11,000 in 2002.
• Annual IRA contributions have increased from $2000 now to $3000 in 2002.
• For producers who purchased assets in 2001, the mid-quarter convention rule has been waived for 2001 for any business that has Sept. 11, 2001 in the third quarter of its tax year. The mid-quarter convention rule stated that if 40 percent of assets were purchased in the last quarter of the year, mid-quarter depreciation rules had to be applied rather than the typical half-year convention rules.

Haugen notes that the IRS is planning to do more payroll and information return audits in the future. Producers are encouraged to file their information returns on time and accurately. The IRS is encouraging electronic filing and electronic tax payments. Electronic filing and paying has been made easier, fewer errors result and it is more cost efficient for the IRS.

"Remember that depreciation rules for property acquired in a ‘like-kind-exchange’ (one property traded for another property) are in effect," Haugen says. For "like-kind-exchange" property placed in service on or after Jan. 3, 2000, taxpayers must make two depreciation calculations. The cash paid to-boot is depreciated as one line-item, and the old property (the property traded in) is depreciated according to the original depreciation schedule. The old property appears on the depreciation schedule even if it is no longer owned

Income averaging rules for farmers have been in effect since tax year 1998. According to Haugen, income averaging allows farmers to level out higher income years with lower income years. "Remember that since 2000, negative taxable income values may be included in the calculation. Tax returns should be reviewed for 1998 and 1999 to see if a negative taxable income existed for any of the base years. You have until April 15, 2002 to file an amended return for 1998. An amended return may produce a refund," he says.

Haugen notes that the use of income averaging my trigger the alternative minimum tax. If the alternative minimum tax is triggered it may result in a higher tax and negate the income averaging benefit.

Crop insurance proceeds and government disaster payments for 2001 received in 2001 may be deferred to 2002 if you qualify, Haugen says. You must use cash accounting and show that you would have under normal business practices included the sale from damaged crops in any future tax year.

The North Dakota tax rates are no longer tied to the federal rates. A new ND-1 form is used to file state income taxes figuring tax on North Dakota income, using the new North Dakota rates.

Farmers who elect to use income averaging (Schedule J) for federal purposes, should also use the new ND-1FA income averaging form for North Dakota.

Any questions should be addressed to your tax professional, the Internal Revenue Service at (800) 829-1040 or the North Dakota State Tax Department at (800) 638-2901. Also you may order Publication 553, Highlights of 2001 Tax Changes, by calling (800) 829-3676.

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Source: Ron Haugen, (701) 231-8103, rhaugen@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu