Tax Pointers for Farmers and 

 Landowners in 1998 



P. Geoffrey Allen 



Department of Resource Economics, University of Massachusetts 



Tax advice given below is intended as general 

 advice and is believed to be correct. It does not 

 substitute for a detailed review of the circumstances of 

 an individual taxpayer by a professional tax 

 practitioner. For more details, you and your tax 

 adviser may wish to consult the sources referenced in 

 the square brackets [thusj (see footnote). Taxpayers 

 filing returns other than for calendar year 1998 may 

 face different rules than those described here . 



New Legislation 



Life seems to be getting ever more complicated. 



• On January 1 , 1 998, many of the provisions of the 

 Taxpayer Relief Act of 1997 "TRA97" (Public 

 Law 105-34) became effective. 



• On July 22, 1998, the IRS Restructuring and 

 Reform Act/ Taxpayer Bill of Rights 3 

 "RRA98"(H.R. 2676) was enacted mto law (P.L. 

 105-206), and many of its provisions became 

 effective on that date. While mostly concerned 

 with internal operations of the IRS, changes in 

 laws governing collection of taxes and "innocent 

 spouse" provisions will affect some taxpayers. 

 The Act also makes technical corrections to 

 TRA97 that affect treatment of some capital gains 

 and losses and sale of a principal residence. 



• Finally, as the last act of the 105"" Congress, the 

 Omnibus Appropriations Act for FY99 "OAA99" 

 (H.R. 4328) was enacted into law on October 21, 

 1998 as P.L. 105-277. It contains several 

 retroactive tax provisions of specific interest to 

 farmers. They are discussed below. 



Income Averaging for Farmers 

 Made Permanent [IRC §1301] 



TRA97 introduced income averaging for farmers 

 for 1998-2000. OAA99 made the averaging provisions 



permanent. 



Use income averaging if you had a successful year 

 in 1 998 and less profit in prior years. The idea is to shift 

 some of your income from the high marginal tax rate 

 you would otherwise face in 1998 to the rate it would 

 have been taxed in earlier years. Schedule J of Form 

 1040 is used for calculations. 



Step 1 . Calculate the tax on your taxable income (farm 

 and non-farm) in 1998. If the last dollar of income is in 

 a higher tax bracket than the last dollar of taxable 

 income in any of the three prior years then income 

 averaging will reduce your 1998 taxes. 



Step 2. Elect the amount of farm income to be 

 averaged. Only farm income can be averaged. 

 However, if your family has high taxable income in 

 1998 because of both farm and non-farm income, you 

 can average the farm income part. Farm income 

 includes gains from the sale of assets (except land) 

 used in the farming business for a "substantial period" 

 (not defined). Sales of machinery and breeding 

 livestock reported on Form 4797 would be eligible. 

 Elect as much of the current year's eligible farm 

 income as you want to distribute over the three prior 

 years. The principle is to get income after averaging 

 approximately level across the years. The more 

 detailed operational rule is explained after the 

 example. 



Step 3. Divide the elected amount of income into three 

 equal parts and add each part to your taxable income 

 (farm and non-farm) in each of the three prior years. 

 Subtract the elected amount from 1998 income. 



Step 4. Using the income levels from step 3, figure the 

 tax for each year using the tax table for that year and 

 add the tax amounts together. 



Step 5. Add the actual taxes paid in the three prior 

 years to the 1 998 taxes from step 1 . 



Step 6. Compare the total from step 4 with the total 



Fruit Notes, Volume 63 (Number 2), Spring, 1998 



