Farm Vehicles

Taxpayers using vehicles in a trade or business may claim expenses and depreciation to the extent of the vehicle's business use. If 80% of a vehicle's use can be documented, then 80% of the total expenses and depreciation of the vehicle are claimable as business expenses.

Light vehicles used in a trade or business are considered to be "Listed Property" under the Internal Revenue Code. If the business use of listed property is 50% or less, the asset must be depreciated under the alternative MACRS life (6 years), using straight-line depreciation. The reportable depreciation expense for these vehicles is limited to the business use percentage of the actual total depreciation calculated.

Taxpayers are required to substantiate the business use of listed property to claim expenses. For vehicles, taxpayers must substantiate the amount of the expense, the time and place of travel, and the business purpose of the trip. Farmers are allowed to claim 75% of the use of a vehicle as business use without substantiation if the vehicle is used during most of the business day directly in connection with the business of farming. The election to use the 75% safe harbor must be made on the first tax return filed after the vehicle is placed in service. The Internal Revenue Service interprets the 75% safe harbor rule as being permitted for one vehicle only.

Constructive Receipt of Income and Deferred Payment Contracts

For cash-basis taxpayers, Treasury Department regulation (Sec. 1.451-2(a) states that income is considered to be received by the taxpayer when it becomes available to him, regardless of whether it is in his possession. Taxpayers desiring to defer constructive receipt of income must use the proper form of deferred payment agreement if they sell commodities in one year with the intent of receiving income in a later year. Substantial restrictions must exist for sale proceeds not to be constructively received at the time of the sale. Proceeds from the sale of commodities are not includible in income until the year of receipt where a bona fide arms-length contract is in place at the time of the sale, with both parties agreeing to the deferral of payment, and the seller has no legal right to demand payment before the date stipulated in the contract.

Examples - Constructive Receipt of Income. Farmer Brown delivers cotton to his local gin in 2002. The gin, as agent for the farmer, sells the cotton to a buyer. No deferred payment agreement is entered into. The cotton is ginned, possession taken by the buyer, and payment made from the buyer to the gin during 2002. The gin holds the money for the farmer until he requests it in 2003.

Farmer Jones delivers his peanuts to a sheller/buyer in 2002. He tells the buyer that he will pick up his check at later date, and does so in 2003.

In both of these examples the sale proceeds have been constructively received by the farmer during 2002 because no legitimate deferred payment agreement existed. In each case, the farmer had the right of access to the money during 2002.

Examples - Deferred Payment Contracts

Farmer Smith delivered and sold peanuts to a buyer in 2002. At the time of the sale, a contract was signed by both parties stipulating that payment for the peanuts would not occur until January, 2003. The contract is legal and binding, and the farmer has no right to demand payment until January, 2003. This is a proper deferred payment contract, and the proceeds are taxable in the year of receipt, for both regular and alternative minimum tax purposes.

Farmers delivering grain to a buyer in one year under a price later contract are entitled to report the payment(s) when received. (Applegate v. Commissioner, 94 TC 696).

Soil and Water Conservation Expenses

Soil and water conservation expense must be consistent with a conservation plan approved by the USDA or a comparable state agency. Expenses incurred in draining or filling wetlands, or in installing or operating center pivot irrigation systems must be capitalized and added to the cost basis of the land. Expenses for ordinary maintenance activities on property already used in farming (such as brush clearing) continue to be deductible to the extent that they are ordinary and necessary business expenses of the taxpayer.

Pre-paid Farm Expenses

Cash-basis farmers may deduct prepaid farming expenses that do not exceed 50% of the total non-prepaid annual farming expenses. If prepaid expenses exceed the 50% limit, the excess expenses can only be deducted as the inputs are actually used. There are two exceptions to the 50% test. The first exception is met if the total prepaid expenses for the three preceding years is less than 50% of the total deductible farm expenses, other than prepaid expenses, for the same period the excess prepaid expenses are deductible. The second is met if the taxpayer fails to meet the 50% limit due to a change in business operations directly attributable to extraordinary circumstances. Farmers prepaying expenses should purchase and make payment for specific quantities of specific products, and either take delivery at the time of payment, or receive a receipt indicating that they have purchased and paid for products in the supplier's current inventory.

Taxation of Capital Gains

The maximum tax rate on individual net long-term capital gains is 20%. Taxpayers in the 10 and 15% ordinary income tax rate brackets will pay 10% tax on net long-term capital gains (8% if the asset was held for five years or more). Recapture of straight-line depreciation on I.R.C. §1250 property is taxed at a maximum rate of 25%.

Home Office Deduction

A home office qualifies as the "principal place of business" if the office is used by the taxpayer to conduct administrative or management activities of a trade or business and there is no other fixed location where the taxpayer conducts such activities on a substantial basis. Deductions are allowed for a home office meeting the above test only if it is exclusively used on a regular basis as a place of business by the taxpayer.

Deduction for Heath Insurance Costs of Self-Employed Individuals

Self-employed individuals are permitted to deduct 70 percent of the amount they pay for health insurance as an adjustment to income on the front of Form 1040 in 2002. In 2003, 100 percent of the amount paid by self-employed individuals for health insurance will be deductible as an adjustment to income.

Increase in Estate and Gift Tax Unified Credit

Effective for decedents dying and gifts made after December 31, 1997, the unified credit is increased from an effective exemption of $600,000 to $1,000,000 in 2006. The increase is phased in according to the following schedule.

Estate Tax Exclusion for Qualified Family-owned Businesses

An executor is permitted to elect special estate tax treatment for qualified "family-owned business interests" if the decedent was a U.S. citizen at the time of death and the aggregate value of the decedent's qualified family-owned business interests that are passed to qualified heirs comprises more than 50% of the decedent's adjusted gross estate. "Family-owned business interest" is defined as an interest in a trade or business with a principal place of business in the U.S. if ownership is held at least 50% by one family, 70% by two families, or 90% by three families, as long as the decedent's family owns at least 30% of the trade or business. Members of an individual's family include the individual's spouse, ancestors, lineal descendants of the individual, the individual's spouse, or of the individual's parents, and spouses of any such lineal descendants.

To qualify for the special estate tax treatment, the decedent or a member of the decedent's family must have owned and materially participated in the trade or business for at least five of the eight years preceding the date of death. Also, each qualified heir, or a member of the heir's family is required to materially participate in the trade or business for at least five years of any eight year period within ten years following the decedent's death. If a qualified heir rents qualifying property to a member of the qualified heir's family on a net cash basis, and that family member materially participates in the business, the material participation requirement is considered to be met with respect to qualified heir.

The exclusion for family-owned business interests may be taken only to the extent that the special exclusion, plus the amount exempted by the unified credit, does not exceed $1.3 million.

Phase-out of Deductible Contributions

Deductible IRA contributions for an individual who is not an active participant in an employer-sponsored retirement plan, but whose spouse is, are phased out for taxpayers between $150,000 and $160,000 AGI.

The Modified Adjusted Gross Income (MAGI) phase-out range for deductible IRA contributions for individuals covered by an employer retirement plan have been increased for tax years beginning after December 31, 1997.

"Roth IRA"

Tax Free Nondeductible IRA's (the "Roth IRA") became available for tax years beginning after December 31, 1997. Contributions to a Roth IRA are nondeductible, and qualified distributions are not included in income. Qualified distributions for all IRA's include distributions made after the taxpayer reaches age 59 ½ , distributions made to a beneficiary on or after the death of the taxpayer, distributions attributable to the taxpayer's disability, and distributions for first time home buyer costs.

IRA Contributions

Deductible IRA contributions of up to $3,000 ($3,500 if age 50 or over) may be made for each taxpayer, including a spouse receiving no compensation, if the combined income of both spouses is at least equal to the contributed amount.

Withdrawals from IRA's for Medical Expenses

The 10% additional tax on premature withdrawals from IRA's will not be applied to withdrawals made to pay medical expenses in excess of 7.5% of the taxpayer's Adjusted Gross Income. The 10% additional tax also generally will not be assessed on withdrawals made to pay an unemployed individual's health insurance premiums.

TAX INCENTIVES FOR EDUCATION

HOPE Tax Credit

The HOPE Tax Credit is a non-refundable tax credit equal to 100% of the first $1,000 and 50% of the next $1,000 of qualified tuition and fees for the first two years of qualified post-secondary education. Qualified tuition and fees are reduced by any tax free educational assistance or benefits received before determining the credit. Books, supplies, meals, lodging, activity fees, insurance, transportation and other personal expenses are not qualified fees.

Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit is a non-refundable tax credit equal to 20% of up to $5,000 in qualified tuition and fees incurred between July 1, 1998 and December 31, 2002, for a maximum tax credit of $1,000. After December 31, 2002, up to $10,000 of qualified tuition and fees will be eligible for the Lifetime Learning Credit (a $2,000 maximum credit). This credit is to be used after the HOPE credit. The credit can be claimed in multiple years, subject to the total dollar limit.

Coverdell Education Savings Accounts

Nondeductible contributions to Coverdell ESAs (formerly Education IRAs) are permitted up to an annual maximum of $2,000 per beneficiary. Contributions to a Coverdell ESA can generally be made until the beneficiary reaches age 18. Although contributions are not deductible by the donor, the amount which can be contributed is subject to a phase-out for single individuals with Modified Adjusted Gross Income (MAGI) between $95,000 and $110,000, and for married couples filing jointly having MAGI between $190,000 and $220,000. Coverdell ESA funds may be used to pay qualified education expenses at any educational level, including elementary, secondary, post-secondary, and non-degree education programs. Qualified expenses include tuition, fees, books, supplies, and equipment. Payments for meals and lodging are permitted for students enrolled on at least a half-time basis. Qualified distributions from Coverdell ESAs are not included in income. Any balance remaining in an Coverdell ESA at a beneficiary's 30th birthday must be distributed. The earnings portion of the distribution will be included in the gross income of the beneficiary and subject to an additional 10% penalty tax. Coverdell ESA balances can be transferred tax free between beneficiaries when the new beneficiary is a member of the family of the old beneficiary. Beginning in 2002, the definition of qualified family members includes first cousins.

I.R.C. Sec. 529 Plans -

Qualified Tuition Programs

The Qualified Tuition Programs allow taxpayers to either: prepay a student's tuition at current year rates by purchasing tuition credits or certificates that allow the beneficiary to either a waiver or payment of qualified higher education expenses, or; contribute to an account that will make distributions to pay the student's qualified higher education expenses at an eligible educational institution.

Plans operate under the laws of the individual states, and no two plans are likely to be identical. Taxpayers are not restricted to using plans established in their home states.

Contributions to 529 plans are not deductible for federal income tax purposes. Distributions, including account earnings, are tax-free, if used for qualified educational expenses of the account beneficiary. There is no MAGI phaseout on donor eligibility to make a 529 plan contribution. Also, there is no federal annual dollar limit on contributions, which are eligible for the annual gift tax exclusion ($11,000 in 2002). Control of a 529 plan account remains in the hands of the account owner, rather than the account beneficiary.

Distributions from 529 plans are not taxable if used for qualified higher education expenses. Qualified expenses are the same as those for the Coverdell ESA, with the exception that qualified expenses under 529 plan rules are expenses for post-secondary education only.

If 529 plan funds are used for purposes other than qualified post-secondary educational expenses, the account earnings attributable to the withdrawal for non-qualified expenses is included in the taxable income of the account beneficiary in the year of withdrawal.

Alex is the beneficiary of a 529 plan account which consists of $20,000 of contributions, and $10,000 of earnings. Alex withdraws $18,000 from the plan account to pay $6,000 of qualified expenses, and to purchase a $12,000 automobile. Since one-third ($10,000 ÷ $30,000) of the account balance consists of earnings, one-third of the withdrawal is considered to be a withdrawal of earnings. Two-thirds ($12,000 ÷ $18,000) of Alex's withdrawal is for non-qualified expenses, two-thirds of the earnings attributed to the withdrawal must be included in Alex's taxable income. The amount included in this case is:

One-third of total withdrawal = $6,000 earnings

Two-thirds of earnings = $4,000 attributable to non-qualified expenses.

In addition to having $4,000 of taxable earnings to report, Alex will also be subject to a 10 percent penalty tax on the taxable earnings.

Contributions to a 529 plan program are generally considered to be completed gifts. As such, they are eligible for the annual gift tax exclusion ($11,000 for 2002). Special gift tax treatment is available for 529 plan contributions exceeding the annual exclusion limit. A donor may elect to treat the amount contributed as being gifted over a five year period. For 2002, this means that $55,000 can be contributed by an individual to a 529 plan, and reported as five $11,000 gifts between 2002 and 2006. Any excess amount contributed above the annual exclusion limit for the year the gift is made is considered a taxable gift for that year.

If the donor making a gift under the five year election dies before the end of the five year period, the portion of the contribution attributable to years beginning after the donor's death is considered to be a part of the donor's estate. The funds are not removed from the 529 plan account, and earnings attributable to the contribution are not included in the donor's estate.

Deduction for Student Loan Interest

A deduction for interest paid on qualified education loans is permitted for interest payments due and paid after December 31, 1997. The deduction is phased in over a four year period. The maximum deduction for 2000 is $2,000, and will be $2,500 for 2001 and later years. The deduction is phased out for individual taxpayers with modified AGI of $40,000 - $55,000, and for married taxpayers with modified AGI of $60,000 - $75,000.

Exclusion of Gain on Sale of Personal Residence

Taxpayers are permitted to exclude up to $250,000 ($500,000 MFJ) of gain realized on the sale or exchange of a principal residence after May 6, 1997. The exclusion is allowed whenever eligibility requirements are met, but no more often than once every two years. To be eligible, a taxpayer must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange.

Standard Deduction of Dependents

For the 2002 tax year, the standard deduction for a taxpayer who is claimed as a dependent on another taxpayer's return is increased to the lesser of (1) the standard deduction for individual taxpayers, or (2) the greater of (a) $700, or (b) the individual's earned income plus $250.

Increase in De Minimis Threshold for Estimated Tax

For tax years beginning after December 31, 1997, the penalty threshold for unpaid tax for individuals increased from $500 to $1,000. The safe harbor rules for making timely estimated tax payments of (1) 90 % of the current year liability, (2) 100% of the prior year liability, or (3) 110% of the prior year liability for individuals with an AGI of $150,000 on the prior year's return also still apply.

Taxpayer Identification Number(TIN)

A TIN is required on the return for any individual for which you claim an exemption on your income tax return.

Child Tax Credit

The Child Tax Credit is a non-refundable credit of $600 for each child under age 17 for the 2002 tax year. The credit is reduced by $50 for each $1,000 (or fraction of) of modified AGI in excess of $110,000 (MFJ); $75,000 (S, HoH); $55,000 (MFS).

"SIMPLE" Retirement Plans

The Savings Incentive Match Plan for Employees (SIMPLE) is a retirement plan for employers with 100 or fewer employees who received at least $5,000 in the preceding year, and who do not maintain another employer-sponsored retirement plan. Employees may make elective contributions, expressed as a percentage of compensation, to an IRA, of up to $6,000 per year. Each employee who received at least $5,000 in compensation from the employer during any two prior years and who is expected to receive at least $5,000 in compensation during the current year generally must be eligible to participate. The employer's matching contributions are deductible, if made by the due date of the employer's tax return. SIMPLE contributions are excludable from the employee's income. Self-employed individuals can participate in a SIMPLE plan.

CONSIDERATIONS FOR ALL
INDIVIDUAL TAXPAYERS

Personal Exemptions

The personal exemption permitted in 2002 for the taxpayer, his/her spouse, and dependents is $3,000 (Federal) and $2,700 (Georgia) for each individual. Additional personal exemptions are no longer available for age or blindness, as the standard deduction is now added to in these situations. The additional standard deduction applies only to the taxpayer and the taxpayer's spouse; no additional standard deduction is permitted for age or blindness of other dependents.

Only one exemption is available for a dependent. If a dependent child files a tax return and claims a personal exemption, the parents cannot claim a dependency exemption for that child on their own return.

Personal exemptions are reduced or even eliminated for certain high income taxpayers. The personal exemption claimable is reduced two percent by each $2,500 or fraction thereof by which adjusted gross income exceeds: $193,400 (MFJ); $96,700 (MFS); $129,850 (Single); $161,150 (Head of Household).

Additions to the standard deduction are allowed on both the Federal and Georgia returns for individuals at least age 65, blind, or both. The addition is $950 for married individuals and surviving spouses, and $1,300 for single individuals.

Filing Requirements

Whether or not a taxpayer is required to file a return depends on gross income, filing status, and the taxpayer's age. Gross income includes all income received in the form of money, goods, property, and services that is not exempt from tax. A taxpayer's filing status is determined by his or her marital status and family situation on the last day of the tax year. Taxpayers age 65 and older have a higher gross income requirement than younger taxpayers. The IRS considers you to be 65 years old on the day before your 65^th birthday.

An individual who is claimed as a dependent on another taxpayer's return must file a return if their unearned income (dividends, interest, etc.) is more than $750; if their earned income is more than $4,700; or if their gross income is more than the larger of $750, or their earned income (up to $4,450) plus $250.

Individuals with net earnings from self-employment of at least $400 are required to file a return and compute self-employment tax regardless of their gross income.

Medical Expenses

Medical expenses are deductible to the extent that they exceed 7.5 percent of adjusted gross income (AGI). Lodging expenses (excluding meals) incurred while receiving medical care are deductible up to $50 per person per night. Non-prescription medicines, except insulin, are not allowed. Miles driven for medical purposes are deductible at the rate of 13¢ per mile.

Taxes

State and local income taxes paid during the tax year are allowable deductions, as are personal real estate and other personal property taxes. Sales taxes are not deductible.

Interest

Interest on debt incurred before October 14, 1987 secured by a qualified residence on October 13, 1987 is considered to be "Acquisition Indebtedness," and is deductible for up to $1,000,000 debt. "Home Equity Indebtedness" is other debt secured by a qualified residence. Deduction of interest on home equity debt is limited to the lesser of: the fair market value of the residence, reduced by acquisition indebtedness, or; $100,000 home equity indebtedness. Consumer interest is not deductible.

Charitable Contributions

Charitable contributions are deductible, up to 50 percent of AGI. Excess contributions are carried to future years. Charitable mileage is deductible at the rate of 14¢ cents per mile. Separate contributions of $250 or more must have written substantiation from the recipient.

Casualties

Gains and losses from personal thefts and casualties are separately netted without regard to the period the properties were held. If recognized gains exceed losses, then all such gains and losses are capital gains. If recognized losses exceed gains after netting, all gains and losses will be ordinary. Losses to the extent of gains are deductible in full. Losses in excess of gains are subject to a ten percent of AGI floor. All recognized losses are subject to a $100 floor before any netting. Taxpayers are not permitted to deduct a casualty loss for damage to insured property not used in a trade or business, or in a transaction entered into for profit, unless the taxpayer files a timely claim, to the extent that any insurance policy provides for full or partial loss reimbursement.

Miscellaneous Deductions

Most miscellaneous deductions must exceed two percent of AGI. The deduction for unreimbursed business meals and entertainment expenses reported on Form 2106 is generally limited to 50% of the actual expense. Individuals claiming the standard mileage rate for vehicle use will be allowed to deduct 36.5¢ for all miles of business use in 2002. The standard mileage rate may be used for both purchased and leased vehicles.

Limitation of Itemized Deductions

For high income taxpayers, itemized deductions are reduced by three percent of AGI in excess of $137,300 ($68,650 MFS). The reduction may not exceed 80 percent of the allowable itemized deductions, and does not reduce the allowable deduction for medical expenses, investment interest, casualty losses, or gambling losses to the extent of gambling gains.

The attached worksheets can be used to project your taxable income and income tax liability. After completing the worksheets, compare your situation to previous years and to your expectations. If you feel you will benefit by adjusting your income before the end of the year, the following suggestions may be helpful.

If Your Net Income is Unreasonably High

Purchase specific quantities of deductible farm inputs (fertilizer, seed, chemicals, feed, fuel, etc.) at a specified price. Remember the 50% limit on prepaid farm expenses.

If necessary, borrow money to pay farm expenses. Be sure that the borrowed money is actually used to pay farm expenses.

If possible, postpone sales until next year. Use written contracts to specify a January payment date on products delivered before January. Be sure to specify that the contract is not assignable. Such deferred payment contracts must be prepared correctly to be legal.

Consider maximizing depreciation expense on capital purchases. The §179 Expense Election permits expensing of up to $24,000 of qualified capital purchases in the year of acquisition. Also, 30% of the basis of new assets purchased in 202 can be expensed using the new 30% AFY depreciation.

Make sure interest payments and employment tax deposits are current. You may also wish to consider making additional payments to employees (bonuses) before the end of the year. When considering bonuses, be sure that the profits of the business and the performance of the employees warrant them.If Your Net Income is Unreasonably Low

Defer expenses, including interest payments, if possible, until next year.

Delay capital purchases until next year, and use alternative depreciation methods to reduce depreciation on this year's capital purchases.

Capitalize major expenses, such as major equipment repair bills, rather than deducting them as current expense.

Speed up your pace of commodity sales, provided you can make a "good" sale.