January 27, 2005

Income Tax Changes for Agricultural Producers

As tax preparation 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 Ron Haugen, North Dakota State University Extension Service farm economist. “Producers have until March 1 to file their returns without penalty. If they made an estimated tax payment by Jan. 18, they have until April 15 to file.”

Items to note for 2004 income tax preparation:

• The personal exemption amount has increased to $3,100.
• The standard deduction has increased to $9,700 for those who are married, filing jointly and $4,850 for singles.
• Qualified dividend income is taxed at a 5 percent rate for individuals in the 10 percent or 15 percent tax brackets and at 15 percent for those in higher tax brackets.
• The 179 expense for 2004 is $102,000, with the inflation adjustment. It is scheduled to remain at the $100,000 base and indexed for inflation up to the year 2008.
• The mileage rate for 2004 increased to 37.5 cents per mile.
• The 2004 Social Security wage base is $87,900; for 2005, it is $90,000.
• The self employed health insurance deduction remains at 100 percent.
• The child tax credit is $1,000 for each qualifying child.
• The annual gift exclusion is $11,000.
• Annual IRA contributions are at $3,000 for 2004, but it is $3,500 if you are 50 or older.
• A 50 percent special depreciation allowance is allowed on new property, with a recovery period of 20 years or less. An election must be made to not take this special depreciation allowance.
• The 2004 tax year is the last year of the 50 percent special depreciation allowance.

The alternative minimum tax (AMT) will not hurt farm income averaging. Income averaging allows farmers to level out higher income years with lower income years. “In the past the AMT may have negated most benefits farmers got from using income averaging,” Haugen says. “Farmers who elect to use income averaging for federal purposes can also use income averaging for state income tax purposes.”

Livestock deferral rules also have changed. Producers in federal disaster areas who were forced to sell livestock because of drought (or other weather-related conditions) now have four years instead of two to replace breeding livestock. Another change is that, if it is not feasible to replace breeding livestock with more livestock, they can be replaced with other farm assets (except land).

There is a new sales tax deduction on Form 1040 Schedule A, Itemized Deductions. Individuals may deduct either their state and local income tax or their state and local sales taxes.

Any questions should be addressed to your tax professional, the Internal Revenue Service at (800) 829 1040 or the North Dakota Tax Department at (800) 638 2901. Producers can order publication number 553, “Highlights of 2004 Tax Changes,” by calling (800) 829 3676.

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Source: Ron Haugen, (701) 231 8103, rhaugen@ndsuext.nodak.edu
Editor: Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu

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