Part 1: Farm Income Tax Management (25 Points)

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.

Schedule FProfit or Loss from Farming

Line 1. Record sales of cattle.$ 96,731

Line 2. Record the original purchase cost of the cattle.$ 41,619

Line 3. Find the taxable gain on cattle (line 1 line 2).$____________

Line 4. Record sales of corn, soybeans and hogs. Do not include$141,622

sales of culled breeding stockthey are taxed as capital gains.

Do not include loans receivedthey are not considered income.

Line 8. Record any crop insurance payments received.$14,300

Line 11.Gross income (sum lines 3 to 10)$____________

Line 35 Record all operating expenses, except purchases of feeder, livestock and depreciable assets. $142,698

Line 36.Find Net Farm Profit. (line 11 line 35). $____________

Schedule SESelf-employment Tax

Medicare tax: 2.9% of Net Farm Profit $____________

Social Security tax: 12.4% of Net Farm Profit, paid on a $____________

maximum of $94,200

Total self-employment tax $____________

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 $10,300 for a married couple filing jointly. $_____________

Line 42. You get an exemption of $3,300 each for four persons. $_____________

Line 43.Federal taxable income (line 37 line 40 line 42) $_____________

Ordinary income to be taxed (line 43 line 13) $_____________

Line 44. Calculate the federal income tax on ordinary income.

a.10% of your first $15,100

$_____________

b.15% of everything from $15,100 up to $61,300

$_____________

c.25% of everything from $61,300 up to $123,700

$_____________

d.Total federal income tax on ordinary income

$_____________

e. Federal income tax on capital gains income (line 13 x 15%)

$_____________

f.Total tax on 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)

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 _______% (if income is under the maximum)

Federal_______% (tax rate on the last dollar of ordinary income)

Total_______%

Note: Most states also impose a tax on income, which would increase the marginal tax rate.

Tax Savings/Tax Management

Legally postponing the reporting of taxable income results in postponement of tax payments and can provide

additional cash to the farm at that time (dont forget it has to be paid eventually).

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? (Meaning that you had an additional $20,000 in income at the end of the year).

$___________

2. Assume an interest rate of 8%. How much additional interest cost would be incurred by having less cash

available due to paying taxes a year earlier? (Meaning if you had to spend that money on paying taxes and didnt

have it to use, how much more would the interest be incurred to the farm?) Hint: Multiple Line 1 by 8%

$____________