FARM INCOME TAX MANAGEMENT The objectives of this exercise are: 1) to illustrate how federal income taxes and self-employment tax are computed. 2) to show how selling decisions at the end of the year can affect taxes and interest costs Complete the lines below for the indicated Internal Revenue Service (IRS) forms. Assume the return is for a married couple filing jointly, with two children Parts AB. and Cars for full credit D and E are extra credit - up to 5 extra credit points A. Schedule F-Profit or Loss from Farming Line 1. Line 2. Record sales of cattle. Record the original purchase cost of the cattle. $ 96,731 $ 41,619 Line 3. Line 4. Line 8. Line 11. Line 35 Subtract to find the taxable gain on cattle. Record sales of com, soybeans and hogs. Do not include $141,622 sales of culled breeding stock they are taxed as capital gains. Do not include loans receivedthey are not considered income. Record any crop insurance payments received $14,300 Gross income (sum lines 3 to 10) Record all operating expenses, except purchases of feeder livestock and depreciable assets. $142,698 Line 36. Find Net Farm Profit (line 11 - line 35). B. Schedule SE-Self-employment Tax Medicare tax: 2.9% of Net Farm Profit Social Security tax: 12.4% of Net Farm Profit, paid on a maximum of $118,500 1 Total self-employment tax C. Form 1040. U.S. Individual Income Tax Complete all the lines that are indicated for Form 1040 Line 13 Sales of culled livestock qualify as capital gains income. (100% if raised on the farm) $ 13,610 Line 18. Farm income (from line 36 of Schedule F). Line 27 One-half of self employment tax (from Schedule SE). Line 37. Adjusted gross income (line 13+ line 18 - line 27). Line 40. You get to subtract the standard deduction of $12,600 for a married couple filing jointly. Line 42 You get an exemption of S4,000 each for four persons. S Line 43. Federal taxable income (line 37-line 40 - line 42) Ordinary income to be taxed (line 43 - line 13) Line 44 b. Calculate the federal income tax on ordinary income. 10% of your first $18.450 15% of everything from $18,450 up to $74,900 25% of everything from $74,900 up to $151,200 Total federal income tax on ordinary income d. e. Federal income tax on capital gains income (line 13 x 15%). f. Total tax of ordinary income and capital gains Line 53. Tax credit for two children ($1,000 per child) Line 58. Enter self-employment tax from page 1. Line 63. What is your total federal and self-employment tax due? (line 44 total-line 53 + line 58) D. Marginal Tax Rate The marginal tax rate (MTR) is the total amount of additional tax due on one additional dollar of taxable income. What was the MTR in this example? Medicare Social Security Federal Total Gif income is under the maximum) % (tax rate on the last dollar of ordinary income) Note: Many states also impose a tax on income, which would increase the marginal tax rate. E. Tax Savings Postponing reporting taxable income results in postponement of taxes, and having the use of the money that would have been paid in taxes for an extra year. 1. How much added tax would you have to pay if you had sold all of your corn that you had at the end of the year for $20,000 additional revenue? 2. How much additional interest cost would be incurred by having less cash available due to paying taxes a year earlier? Multiply line 1 by an assumed interest rate of 6 %. 3. How much interest cost would be saved by having cash available from selling com sooner? Assume the sale value would not change from your calculation in line 1, and that income would be received 4 months sooner. Multiply line 1 by 6%, for 4 months 4. Would the interest savings have exceeded the extra interest cost from paying taxes a year sooner? FARM INCOME TAX MANAGEMENT The objectives of this exercise are: 1) to illustrate how federal income taxes and self-employment tax are computed. 2) to show how selling decisions at the end of the year can affect taxes and interest costs Complete the lines below for the indicated Internal Revenue Service (IRS) forms. Assume the return is for a married couple filing jointly, with two children Parts AB. and Cars for full credit D and E are extra credit - up to 5 extra credit points A. Schedule F-Profit or Loss from Farming Line 1. Line 2. Record sales of cattle. Record the original purchase cost of the cattle. $ 96,731 $ 41,619 Line 3. Line 4. Line 8. Line 11. Line 35 Subtract to find the taxable gain on cattle. Record sales of com, soybeans and hogs. Do not include $141,622 sales of culled breeding stock they are taxed as capital gains. Do not include loans receivedthey are not considered income. Record any crop insurance payments received $14,300 Gross income (sum lines 3 to 10) Record all operating expenses, except purchases of feeder livestock and depreciable assets. $142,698 Line 36. Find Net Farm Profit (line 11 - line 35). B. Schedule SE-Self-employment Tax Medicare tax: 2.9% of Net Farm Profit Social Security tax: 12.4% of Net Farm Profit, paid on a maximum of $118,500 1 Total self-employment tax C. Form 1040. U.S. Individual Income Tax Complete all the lines that are indicated for Form 1040 Line 13 Sales of culled livestock qualify as capital gains income. (100% if raised on the farm) $ 13,610 Line 18. Farm income (from line 36 of Schedule F). Line 27 One-half of self employment tax (from Schedule SE). Line 37. Adjusted gross income (line 13+ line 18 - line 27). Line 40. You get to subtract the standard deduction of $12,600 for a married couple filing jointly. Line 42 You get an exemption of S4,000 each for four persons. S Line 43. Federal taxable income (line 37-line 40 - line 42) Ordinary income to be taxed (line 43 - line 13) Line 44 b. Calculate the federal income tax on ordinary income. 10% of your first $18.450 15% of everything from $18,450 up to $74,900 25% of everything from $74,900 up to $151,200 Total federal income tax on ordinary income d. e. Federal income tax on capital gains income (line 13 x 15%). f. Total tax of ordinary income and capital gains Line 53. Tax credit for two children ($1,000 per child) Line 58. Enter self-employment tax from page 1. Line 63. What is your total federal and self-employment tax due? (line 44 total-line 53 + line 58) D. Marginal Tax Rate The marginal tax rate (MTR) is the total amount of additional tax due on one additional dollar of taxable income. What was the MTR in this example? Medicare Social Security Federal Total Gif income is under the maximum) % (tax rate on the last dollar of ordinary income) Note: Many states also impose a tax on income, which would increase the marginal tax rate. E. Tax Savings Postponing reporting taxable income results in postponement of taxes, and having the use of the money that would have been paid in taxes for an extra year. 1. How much added tax would you have to pay if you had sold all of your corn that you had at the end of the year for $20,000 additional revenue? 2. How much additional interest cost would be incurred by having less cash available due to paying taxes a year earlier? Multiply line 1 by an assumed interest rate of 6 %. 3. How much interest cost would be saved by having cash available from selling com sooner? Assume the sale value would not change from your calculation in line 1, and that income would be received 4 months sooner. Multiply line 1 by 6%, for 4 months 4. Would the interest savings have exceeded the extra interest cost from paying taxes a year sooner