Article Posted on 02/18/2020
One tax savings opportunity farmers have is gifting grain to children or maybe even elderly parents to fund the child and save taxes. If done correctly this is a great opportunity. When you are gifting grain or other commodities, it is important to make sure that the gift is of grain harvested in the prior year. If you gift harvested grain in the current year, you must reduce your expenses by the allocated costs of that grain. Even though we are experiencing low commodity prices and costs are equal to revenues, this would result in no income tax benefit to the farmer, however, the child would not have much tax owed either.
Even at break-even the gift of prior year’s crop is better.
For example, a farmer gives last year’s grain of $10,000 so income goes down by $10,000 saving him $4,000 in combined federal state and self-employment taxes. His child now has a basis of zero and will be tax based on short-term capital gains at slightly less than 25% (the kiddie tax will apply). Let’s assume this overall tax would be $2,500. In this case, the family saves $1,500. But if the child can wait a year after harvest then this would be a long-term capital gain and possibly owe no tax.