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). $55,112

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) $211,034

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). $68,336

Schedule SESelf-employment Tax

Medicare tax: 2.9% of Net Farm Profit $1,982

Social Security tax: 12.4% of Net Farm Profit, paid on a $ 8,474

maximum of $94,200

Total self-employment tax $10,456

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). $68,336

Line 27. One-half of self employment tax (from Schedule SE). $5,228

Line 37. Adjusted gross income (line 13 + line 18 line 27). $76,718

Line 40. You get to subtract the standard deduction of $10,300 for a

married couple filing jointly. $10,300

Line 42. You get an exemption of $3,300 each for four persons. $ 4 * $3,300 = $13,200

Line 43. Federal taxable income (line 37 line 40 line 42) $76,717 - $10,300 - $13,200 = $53,218

Ordinary income to be taxed (line 43 line 13) $53,218 - $13,310 = $39,908

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

a. 10% of your first $15,100 $39,908 - $15,100 = $24,808

b. 15% of everything from $15,100 up to $61,300 $3,721.2 (remaining original income in the bracket is $0)

c. 25% of everything from $61,300 up to $123,700 $ 0

d. Total federal income tax on ordinary income $1,510 + $3,721.2 = $5,231.2

1. Federal income tax on capital gains income (line 13 x 15%) $2,041.5
2. Total tax on ordinary income and capital gains $7,272.7

Line 53. Tax credit for two children ($1,000 per child) $2,000

Line 58. Enter self-employment tax from page 1. $10,456

Line 63. What is your total federal and self-employment tax due? $7,272.7 - $2000 + $10,456 = $15,728.7

(line 44 total line 53 + line 58)

**********JUST NEED HELP WITH BOTTOM PORTION********

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).

$___________

1. 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%

$____________

Part 2: Comparing Tractor Financing Options (25 points)

After land, machinery is often the largest single investment on a farm. Many dollars can be saved by carefully exploring all options for acquiring machinery. The objective of this exercise is to compare three different plans for financing the

purchase of a new tractor.

Financing Options

A new tractor can be acquired by:

1. Outright purchase for cash, at a cost of $64,500.
2. Purchase by an installment contract with a down payment of 20% of the purchase price and four equal annual payments, with a 7.5% annual interest rate
3. A four-year lease plan with annual payments of $12,250 followed by a purchase at a buyout price of $30,000.

Discounting future payments to their present value allows you to directly compare the financing plans. Each future payment is converted to a present value by dividing it by (1 + the discount rate) for each year into the future that it occurs. Assume your average cost of capital, minus inflation, is 6%, so you would use a factor of 1.06 per year to discount future payments to their present value.

For example:

Future payment = $10,000 three years from now

Present value = $10,000 / (1.06 x 1.06 x 1.06) = $10,000 / (1.06)3 _{= $8,396}

Alternative 1. Purchase tractor outright. There is no need to discount the payment, since it is made at the time of purchase.

Purchase price $______________*

Alternative 2. Pay 20 percent of the purchase price down and finance the remainder with 4 annual payments, beginning in one year. The amortization factor for a 4-year, 7.5% interest loan is .29857.

Annual payment = purchase price x 80% x amortization factor = $_______________*

*Round values to the nearest whole dollar.

Alternative 3. Lease the tractor for 4 years, then purchase it for the buyout price (see Table 1). Lease payments are due at the beginning of each year.

Comparison

Under which plan do you pay the most total dollars, before discounting? _______________________

Which alternative plan has the lowest present value, after discounting? __________________________

Which has the lowest payment at the time of purchase? _______________________________________

Which financing alternative would you choose, and why? _________________________________________

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