Fall is a wonderful time of year, not just because of the much-needed reprieve from hot temperatures, but also for the many wonderful events it brings – fall colors, trick-or-treating for the kids and Thanksgiving gatherings with family. But fall also brings the culmination of our year’s efforts in the form of harvesting crops and weaning this year’s calves. It’s so enjoyable to see all our hard work and challenges come to fruition.
But as we begin to anticipate the financial rewards soon to come, I challenge you to stop for a moment to evaluate if you are maximizing the use of those funds. Is there a way to make your money go further? Could you donate some of that grain or calves prior to their sale, helping both you and local charities?
Let’s consider the following example: Assume you are about to sell $10,000 worth of something such as grain or raised calves. If you sell those assets, at the end of the year, you have to pay taxes on the sale. If you are in the 12% federal tax bracket, you write a check for $1,200, if you are in the 22%, it’s $2,200. In my home state of Missouri, the state income tax rate is 5.3%, so that’s another $530. If your farming operation is profitable, you get to pay 15.3% into self-employment (SE) tax for Social Security and Medicare. (It does not cost exactly 15.3% because you get to deduct a portion, but for simplicity let’s use that figure.) So for the 12% bracket taxpayer, it’s a total bill of $3,260. Add another $1,000 if you are in the 22% bracket.
Many individuals desire to give back to charitable organizations such as their local church. If a person takes the $10,000 cash received from the sale and donates it to their favorite charity, and if you have enough other deductions to itemize totaling greater than the standard deduction, the donation may save you some money at tax time. If you have enough deductions, you may save the federal and state taxes but are still required to pay the self-employment tax regardless.
However, in 2017, the Tax Cuts and Jobs Act doubled the standard deduction, therefore, many taxpayers no longer have a benefit to itemizing simply because the standard deduction everyone receives is so much higher. In 2022, the standard deduction for a married couple filing jointly is $25,900, so unless your itemized deductions are greater than that, you will not receive any tax savings from the donation. The taxpayer still pays $3,260 (or $4,260 in the 22% tax bracket) in taxes at the end of the year even after having given the $10,000 away.
But what if rather than donating the $10,000 in cash, you donated the asset to a local charity prior to its sale? You could still deliver the grain to the elevator or the calves to the sale barn on behalf of the charity. But the charity must decide when to sell it. The farmer must relinquish dominion and control over to the charity, and the commodity cannot have any prior sale or pricing contract.
Now, since the farmer does not sell anything, no income taxes are owed. The charity is a not-for-profit, so they do not owe tax either. The farmer just saved $3,260 in taxes. The $10,000 donation only cost you $6,740 because you did not have to pay the $3,260 in taxes at the end of the year. In essence, the charity receives $10,000 but only $6,740 comes from you; the remaining $3,260 comes from Uncle Sam (and your state department of revenue).
For this to work properly, you must work closely with your income tax professional because there are very specific steps required by the IRS to ensure the intended tax benefits. Title to the asset must be transferred prior to sale. The charity must decide when to sell it, not you. You cannot just deliver grain to the elevator or calves to the sale barn and say, "Make the check out to the charity." However, with some prior planning and needed paperwork ahead of time, your donation can create tremendous income tax savings and allow you to give even more to your local charity.
