Mr. David Miller, Farm Management Specialist, Ohio State University Extension
The Jobs and Growth Tax Relief Reconciliation Act of 2003 contains provisions for reducing capital gains rates, reducing the rates for taxation of dividends, widening the 10% tax bracket, increasing the standard deduction for married couples filing jointly, increasing the child tax credit, and reducing all tax rates by at least 2%. Business provisions include increasing the allowable limit for Section 179 expensing to $100,000 and a 50% first-year depreciation allowance. How will all these changes affect the 2003 tax bill for your dairy operation and your family?
To estimate the potential impact of the new legislation for various family situations, a dairy operation with the following income and expense figures was used. The farm has projected income of $350,000 consisting of $285,000 milk sales, $6,250 calf sales, $12,000 cull cow sales, $28,150 Milk Income Loss Contract (MILC) payments, $7,000 other agricultural program payments, and $11,600 other farm income. Projected farm expenses are $318,500 including depreciation. Net farm income would be $31,500 consisting of $19,500 from Schedule F and $12,000 of capital gains from the sale of the raised dairy cows.
For a married couple filing jointly (MFJ) with no other dependents, the "old" law tax bill would be $1,607 income tax plus $2,755 self-employment (SE) tax for a total bill of $4,362. Under the provisions of the new legislation, the total tax bill is $3,807, $1,052 for income taxes and $2,755 for SE tax. The new legislation saves $555 in Federal income taxes for this family situation. For a married couple filing jointly, but with two dependent children over the age of 17, the income tax reduces from $997 (old law) to $442 (new law) and the SE tax of $2,755 remains constant. Again the new law results in a savings of $555. A third scenario is the same married couple, but with two dependent children under the age of 17 who qualify for the child tax credit. Under these facts, the income taxes are reduced by $555, the same as before, but the child tax credit offsets all the income taxes and partially reduces the SE tax of $2,755 owed in both the old and new law scenarios.
Since most farm families also have some off-farm income, $10,000 was added to the net farm income of $31,500 to see how the families above would fare. The results are similar. For the married couple with no other dependents, the income tax savings are $659 ($2,711 vs. $2,052); for the family with two dependents over the age of 17, the income tax savings are $555 ($1,997 vs. $1,442). For the family with the two children under the age of 17, the tax savings is $555, but the child tax credit reduces the income taxes to $797 and $0, respectively, resulting in an overall decrease of $797.
A dairy farmer can further reduce taxable income and income taxes by using strategies such as pre-paying expenses or using Section 179 expensing. However, the objective of year-end tax management is to have at least enough taxable income to absorb the allowable exemptions and the standard deduction; $21,700 for MFJ with two other dependents and $15,600 for MFJ with no other dependents. In the scenarios where there is only farm income, an increase of $15,600 (MFJ and no other dependents) or $9,000 (MFJ and two other dependents) from Section 179 or pre-paying expenses would reduce taxable income to a level that just absorbs the allowable exemptions and the standard deduction in each case. With addition of the $10,000 off-farm income, the increased expense amounts of $25,600 or $19,000 are needed to reduce taxable income to zero. These increased amounts are well below the new $100,000 limit for Section 179, so this provision is of limited value to this dairy farm business. The same would be true of the new 50% first depreciation allowance.
How well does this dairy farm family fare under the new 2003 tax legislation? There are tax savings but maybe not to the degree envisioned. Using the above examples, the tax savings come from the increased standard deduction for married filing jointly, widening of the 10% tax bracket, reducing the capital gains tax rates, and increasing child tax credit. If incomes were higher for this family, the tax savings would be greater and the business provisions of the increased Section 179 and the special first depreciation allowance would be of more value.