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Jim Meade / Iowa City
Senior Advisor

Pushing The Tax Boulder Up Hill

The CPA says I goofed.  I don't have any money, but I managed to pile it all up on one year so it bumped my tax bracket up.  So, he told me to go out and buy a pickup.  I need the pickup, no doubt of that.  Was going to have to buy one anyway.

 

As I near retirement, I find tha paying into IRAs looks kind of silly.  My income is not going to come down so I'll be in the same tax bracket as if I'd taken the money and used it.

 

Looking ahead to closing out farming means dealing with grain sales and equipment sales without bunching the income up again.  I'll ahve to carry come grain over for more than a year and maybe hold equiopment for two.

 

What are you finding out about transition planning?

5 Replies
sw363535
Honored Advisor

Re: Pushing The Tax Boulder Up Hill

I have advised that several times....

 

If one is going to have enough rental income from farm land after retirement to equal a liveable wage, then deal with the tax issue another way and spend what would have been the IRA money on land improvements or another piece of land.  Over the years it will work out as well or better.  An investment that increases the rental income long term and is depreciable in the last few years of active farming is the best..

 

The answer is different if one is not a land owner.  Then an IRA makes good tax savings sense...

 

 

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OKdon
Senior Contributor

Re: Pushing The Tax Boulder Up Hill

From my perspective, the IRA is a poor competitor to land purchases. I cashed my IRA and invested it in farm land. The farm land investment does not limit you on how much you invest. The Ira requires you to take benefits after a certain age and pay taxes on the proceeds. Farm land is a private investment and you can retain the investment for as long as you live.

 

What is better than investing in your own business? Want to save money each and every year? What better way than using your land contract as a savings account. Cast a few extra thousands in principal payments and retire the debt sooner. Or retain the extra cash for the down stroke on the next buy.

 

Another thing I did was sell my equipment and invest the proceeds in another 80 and hire my land custom farmed. The income keeps flowing in and my machine hire may well be cheaper that maintaining equipment. Health conditions is what persuaded me to retire. I was and accident waiting to happen. Fall off a combine or a grain bin and the healing process can be incredibly long.

 

You might try the custom farm route and take a few years to liquidate your excess grain inventory. Relieve the pressure to liquidate machinery and and grain inventory in one year. It's not tax avoidance but income averaging. it might be helpful for you. Or rent part of your land out and have the rest custom farmed. Or perhaps you would just rather let the IRS take a chunk and have it over with.

 

Good luck with your retirement.

 

 

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k-289
Senior Advisor

Re: Pushing The Tax Boulder Up Hill

I R A  being an insturment designed to lessen the employers withholding burdens although extracting  $$$  out the IRA can and will be a challange - as I am witnessing personally at this point --- Real Estate investments on most levels will put the other investments pail in comparison - ask the Enron folks --- I have been told professionally - Liquidating machinery and other capital unvestments have a lesser tax burden than ordinary income so it has been a win win for us over our houtly employed neighbors - although it seems YOUR tax advisor would give you their best advice for you -  GOOD  LUCK  Jim

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sw363535
Honored Advisor

Re: Pushing The Tax Boulder Up Hill

The equipment issue.....

 

I agree with 289, and I have seen it handled several ways....  Sell suddenly(an auction), sell privately, delay to avoid tax..., lease out, etc...  It depends on the quality, desirability, and currentness of inventory,  this choice you make..

 

The worst choice I have seen was to maintain ownership and drag out the disposal over several years....  The process itself will devalue the transfer more than taxes would have the day they were parked..  It becomes a dismal salvage job in some cases.

 

The choice I liked the most was one of two....... Line it up and sell when the market is hot (usually related to grain prices).  The tax issues can be dealt with in other ways..   OR   a lease/purchase agreement over a 5-10 year period, where you retain ownership until the last year and sell at the disposal price in the last year...   That worked well a few years ago though tax code might have changed since.

 

Much depends on the currentness of the equipment and the desirability.    Both of which are deteriated with time.....

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OKdon
Senior Contributor

Re:Another advantage

If you choose to have it custom farmed, you have the option of land improvement such as pattern tiling with part of your windfall profits. I did that on a couple of 80's with the intent of heirs benefiting in future years. Plus those pesky wet acres can finally be improved like you always wanted to do when you were struggling to make a living.

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