Gifting Commodities to Charity:
Due to the increased standard deduction, contributions to charities are usually no longer a tax advantage. Gifting of a commodity directly to a charity (instead of selling it first and then donating the proceeds) gives the donee (cash method farm proprietor) the following advantages:
1) Avoids claiming the contribution as an itemized deduction.
2) Saves income tax based on tax filer’s tax rate (Savings = gross contribution X tax rate percent).
3) Usually saves self-employed social security tax (Savings = gross contribution X .1413)
The gifting must be handled correctly! Gift the commodity to the charity and have the charity take the risk of sale price.
Tom Smith usually reports about a $50,000 profit on schedule F on his joint return. Their other income on the 1040 is about $50,000. Their normal charitable contribution of $5,000 has not been enough to itemize deductions for quite a few years. If Tom were to gift $5,000 of raised unsold grain to the charity he would reduce their federal income tax by $1,250, his SE tax by $706 and their Montana state tax by $345 for a total tax savings of $2,301.
Spousal Employment Arrangements:
Self-employed businesses and farmers with no other employees could deduct, as a business deduction, their family's health insurance premiums and out-of-pocket medical expenses. You would do this by employing your spouse and paying them a wage and benefit package including the insurance and out-of-pocket medical expenses. The rate of pay must be commensurate with other workers in the area.
Medical deductions are currently allowed as itemized deductions on schedule A and are subject to a 7.5% AGI limitation. They are then added to the other itemized deductions available. In order for them to be deductible, all of the itemized deductions totalled together must be more than the standard deduction. Deducting these medical deductions on schedule F or C instead of A saves income tax and self-employment tax.
In order for these spousal arrangements to work with the IRS, there needs to be a written employment agreement between the employer and employee. The employment agreement needs to specify the number of hours the spouse is required to work, the days and times the spouse is required to be available for work and the duties of the employee. The spousal employee needs to document their number of hours worked and the nature and extent of the services performed just like any other employee.
Commodities as wages:
Payments to employees in commodities instead of cash are not subject to FICA, FWHT, or FUTA.
Reporting and tax treatment for commodity wages:
1) Employer picks up commodity as income equal to the amount paid to the employee.
2) Employer lists as a wage deduction the amount paid to the employee.
3) Issue a W-2 to the employee including total commodity wage in box 1 and zero for FICA and Medicare wages.
4) There should be a written agreement/contract between the employer and employee listing the quantity or percent of the commodity that will be paid as wages.
5) The employee must receive ownership of the commodity and be at risk of a market change in order to satisfy the commodity as wages tax rule. The length of time the commodity is retained by the employee prior to sale is subject to scrutiny by the IRS. The longer the holding period, the better chances the commodity as wages contract will hold up under that scrutiny.
6) Commodity must be raised by employer.
ROTH IRAs for your kids:
This is a tax saving idea for self-employed individuals filing schedule C. or schedule left on their 1040. If you have kids under the age of 18 but old enough to earn wages in your business (running errands -- cleaning) . A planning opportunity that could make their retirement.
If you pay them $4,000 per year and put that $4,000 into their Roth IRA instead of a savings account, all earnings on the account are tax-free. The $4,000 gets deducted from your business income as wages and saves you both income taxes and self-employed social security tax. The $4,000 are then taxed at the student's lower income tax rates if at all.
If you deposit $4,000 per year for 10 years at 8% (from the age of 8 to 18) by the time they retire at age 60 their IRA account would be worth over $2 million using the Rule of 72.
Other benefits of a Roth IRA for students:
1) Saving accounts limit their eligibility to get student aid during college years - Roth's do not.
2) Withdrawals of original contributions used for college education are penalty-free.
3) Withdrawals of original contributions up to a maximum of $10,000 are penalty-free for first-time home purchase.
Of course, you'll have to issue a W-2 each year, but there would be no withholding for Social Security, FIT or State IT.
Rural Jobs Tax Credit:
Hiring a new employee who resides in a "rural renewal county" may give the employer tax credit up to $2,400 per hire (40% of the first $6,000 of wages).
Requirements of the job tax credit:
1) Employee who has attained age 18, but not age 40.
2) Employee hired after May 25, 2007.
3) Employee has their principal residence within a rural renewal county. (Eligible counties, in 32 states, are listed in the instructions to IRS Form 8850.)
4) Employee must not have worked previously for the employer.
5) Employee may not be a related party.
6) Employee must have worked at least 120 hours.
7) Employer must file the original signed copy of Form 8850 (Pre-screening Notice and Certification Request for the Work Opportunity Credit) within 28 days of the employees hire date. Along with Form 8850 the employer must submit Form 9061 (Individual Characteristics Form). For purposes of this credit questions 9 and 14 should be answered "yes". Submit the forms along with the required supporting documents listed in Form 9061 instructions to:
P.O. Box 1728
Helena Montana 59624-1728
8) Keep track of total hours worked by employee. You'll need this information at tax time to complete your tax return.
Health Savings Account:
Beginning in 2004, individuals can establish health savings accounts (HSAs). Contributions to an HSA can be funded by the individual or an employer or both and are fully deductible. If funded by the individual, it's an above the line (pre-AGI) deduction. Form 8889 (Health Savings Accounts) is used to report the HSA on your tax return. Any earnings inside the HSA accounts are not taxable as long as the distributions are used for qualified medical expenses. See IRS Publication 502 for a guideline on qualified medical expenses. Any distributions prior to age 65 not used for qualified medical deductions are subject to income tax and a 10% penalty. After age 65 or the individual becomes permanently and totally disabled there is no 10% penalty on withdrawals.
1) Must be covered by a high deductible health plan (HDHP). Ask your insurance carrier if your insurance plan qualifies.
2) Cannot be covered by another health plan.
3) Must be under age 65 (not entitled to Medicare coverage).
4) Cannot be claimed as a dependent by another taxpayer.
There are maximum annual funding limits for both individual and family accounts. There are catch-up contributions available between ages 55 and 65. HSA funds not used during the year are carried over to offset future medical costs.