Tax Time Tips

§ Well, we all survived the tumble off the fiscal cliff. Unless you are an individual earning more than $400,000 or a married couple earning more than $450,000, the primary impact was the elimination of the 2% payroll tax holiday. The federal estate tax continues to exempt $5 million per decedent and if a married decedent does not use the full $5 million, the unused portion can be tacked onto the surviving spouse's $5 million exemption. The gift tax reporting exclusion increases to $14,000 per beneficiary per year. Gift tax and generation skipping transfer tax also exempt up to $5 million per donor. These exemptions are now permanent and will not sunset.
§ Turning to income tax, the IRS announced at tax school that they will be targeting education credits and charitable contributions for audit this year. If you claim more than $25,000 in charitable contributions, the chances are very high that you will be selected for an in-person audit. You must have a contemporaneous written receipt for each donation over $250 to a particular charity. In-kind contributions valued at more than $5,000 require an independent appraisal. Education credits will be audited with enhanced 1098-T matching.
§ IRS is also stepping up compliance audits on partnerships and S-corporations.
§ As was the case last year, penalties are draconian if you fail to report income on any assets you hold outside of the United States.
§ IRS continues to see an increase in fraudulent tax return filing. Your best defense against someone filing a return with your SS# is to file your own return first. However, IRS will not be accepting any tax returns before January 30, but promises to have all tax forms approved by March 19. The deadline for farmers and fishermen to file their returns without penalty for failure to estimate has been extended to April 15. Tip to college student parents: “Balance due” tax returns will not be available for download to FAFSA until June 1 this year, so if this affects you, make estimated tax payments or increase your withholding if you generally pay with your return.
§ IRS requires mileage logs for vehicles with business use; standard mileage rates for 2012:
* * * * * * * * * * * * * Federal * * * * * * * * * * * * * *Iowa
Business: . . . . . . . . . . 55.5¢/mi. . . . . . . . . . . . . . 55.5¢/mi.
Medical & moving: . . . . . 23¢/mi. . . . . . . . . . . . . . 23¢/mi.
Charitable . . . . . . . .. . 14¢/mi. . . . . . . . . . . . . . . 39¢/mi.
§ You are required to send a Form 1099 to any individual, partnership or LLC that you paid $600.00 or more for services, rent or interest. Payments to cooperatives, banks and other corporate entities are excluded. Wages in excess of $150 in any quarter require the filing of Forms W-2 and W-3.

Dual Represntation

_____Representation of both buyers and sellers in a real estate transaction gives rise to apparent, potential, and actual conflicts of interest. An attorney may provide legal services in such a situation only if there has been a full disclosure of the conflict of interest in writing and an explicit waiver of any actual or potential conflict of interest by the parties involved. Potential risks of waiving any objection to the conflict of interest include the following: ___1....Should a legal dispute arise between the buyers and the seller, I would be prohibited from rendering further legal services for either party in this matter. ___2....Information that would otherwise be protected by attorney-client confidentiality may be disclosed to the opposing party as a result of dual representation. ********************************************************** ______I do not recommend such dual representation, but it is not unheard of in rural Iowa, where relatively small stakes and economy often take precedence over an abundance of caution. In such situtations you should treat me as if I am working for the other side, because I am, regardless of who is paying the bill. ************************************************************* ______You are advised to seek independent legal advice regarding whether you should waive any actual or potential conflict of interest. You should not sign any document that you do not fully understand.

Thank you to those who joined me in supporting Kelsey Clark; she was a fine candidate for the Iowa House of Representatives representing Grimes and Johnston in the Iowa Legislature: Iowa House Dist 39

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Tax Time 2012

It is time again to be thinking of income taxes. IRS in its continuing effort to close the tax gap (the gap between income tax paid and the income tax that ought to be paid, estimated to be over $300 billion) is requiring increased documentation on capital gains (and a new Form 8949) and stepping up audits on capital gains. Congress has also stiffened reporting requirements and penalties on foreign held assets. Because the penalties are so high ($10,000 minimum for inadvertent misreporting; $100,000 or half the balance of the account, whichever is greater, for intentional misreporting), I cannot prepare your tax return if you hold any assets outside of the United States. On the positive side, conversions from traditional retirement plans to Roth IRAs are no longer limited by income and taxpayers with gross income less than $57,000 and access to the internet are eligible for free tax preparation and filing. IRS requires mileage logs for vehicles with business use; standard mileage rates for 2011: Jan 1 to June 30 July 1 to Dec 31 Iowa Business: 51¢/mi. 55.5¢/mi. “ Medical & moving: 19¢/mi. 23.5¢/mi. “ Charitable 14¢/mi. 14¢/mi. 39¢/mi. You are required to send a Form 1099 to any individual, partnership or LLC that you paid $600.00 or more for services, rent or interest. Payments to cooperatives, banks and other corporate entities are excluded. Wages in excess of $150 in any quarter require the filing of Forms W-2 and W-3. If you would like us to prepare these forms, you will need to provide us with the information before January 27, 2012. If you have questions on any of the above or other tax matters feel free to call, e-mail, or stop in. When you have your records ready you may let us know and we will set up an appointment that is convenient for you. Evening or Saturday appointments can be arranged. Pursuant to U.S. Treasury Regulations, you are hereby advised that any federal tax advice included in this communication is not intended or written to be used, and cannot be used, to avoid any U.S. federal tax penalties or to promote, market, or recommend to another party any transaction or matter. For further information, see IRS Circular 230.

Liz Mathis for Iowa Senate

Those of you who favor progressive economic development in Iowa should consider supporting Liz Mathis in her bid to fill the vacant Iowa Senate seat in the Marion/Robins/Hiawatha area.* Her webpage is http://www.mathis4statesenate.com/

* Thank you for the correction IowaWineGuy!

2011 Farm Cash Rent Update

© _ _ _ Now is the time dictated by Iowa law to begin negotiating crop land leases for 2012 or at least notify your tenant/landlord, as the case may be, if you wish to change any of the terms in your current leas. (Remember that mutual consent is required if you want to make changes in the middle of a multi-year lease.)
_ _ _ If you wish to terminate a cropland lease ending March 1, 2012, and have not already done so, you must serve notice in the manner set out in Iowa Code §562.7 on or before September 1, 2010. This statute does not apply to forage land leases (pasture and hay) or custom farming arrangements, but by tradition, many farm operators have come to expect notice by September 1 and may become surly or even confrontational if notice is delayed past that date.
_ _ _ Basing cropland rent on the CSR (“corn suitability rating” or in some regions “crop suitability rating”) of the soil in question is the most accurate and fair way to arrive at a comparable rent [See Computing a Cropland Cash Rental Rate: http://www.extension.iastate.edu/Publications/FM1801.pdf]. As Hertz Farm Management, Inc., has noted, cash rental rates have tended to lag behind the run up in farm land prices [http://www.hfmgt.com/newsletter/pdf/2011summer.pdf]. Below is a table of farmland values and cash rents from last year's ISU surveys in counties for which I prepare farm land leases:

_ _ _ There is considerable variation, because the quality of the farmland sold does not necessarily correlate with farm leases that were surveyed, either of which might vary from the county's average CSR. In addition, these figures do not reflect the sharp increase in farm land values since last year. Below is a table of farmland sales for Adair County in the spring of this year:

_ _ _ If you throw out the bargain sales and the “through the roof” sales, you see a floor of about $66.66/CSR pt for middling 50 CSR ground and a median range of $73 to $110 / CSR pt for better quality farmland which would predict rent in the $160 to $400/acre range (assuming the historic 4-5% return on investment on farmland). That coincides with the negotiated farmland leases I have written this year, which fall in the following table:

CSR RANGE * * * * * * * MEDIAN RENT/CSR pt
_ 45-55 . . . . . . . . . . . . . $2.20 - 2.80
_ 56-65 . . . . . . . . . . . . . $2.75 - 3.25
_ 66-75 . . . . . . . . . . . . . $3.20 - 3.50
_ 76-85 . . . . . . . . . . . . . $3.30 - 3.60
_ 86-99 . . . . . . . . . . . . . $3.50 - 3.80

_ _ _ This is a considerable jump from the $3/pt that predominated the rents on good quality farm land in this area for the last couple of years. This has sparked considerable interest in flexible or variable rent leases, including hybrid share leases, bushel leases, and net share leases. These types of leases are more complex than cash rent leases, but allow the landlord to share in the returns (as well as the risks) of production and if properly structured afford the landlord the opportunity to take advantage of special use valuation in the event federal estate tax is a concern (current exemption is $5 million per individual or $10 million per married couple).
_ _ _ Good luck with your negotiations! _ _ _ ©2011

Our Complicated Tax Code

If you wonder why I sometimes have a bewildered look when you ask a tax question, here is a clue: In her 2008 Annual Report to Congress, the National Taxpayer Advocate, Nina Olson, complained about the Tax Code’s complexity including (among many other examples) “at least 16 separate incentives to encourage taxpayers to save for retirement. These incentives are subject to different sets of rules governing eligibility, contribution limits, taxation of contributions and distributions.” She also criticized the constant changes, pointing out that amendments to the Tax Code were made at the rate of more than one per day in the five years from 2003–2008. Read her report: http://www.irs.gov/advocate/article/0,,id=202276,00.html [Vol. 11, No. 1 Choate’s Notes Spring 2009]

I don't have very much good to say about the Reagan Administration. If you want to see where our federal debt trouble began look there. However, one of the things it got right was the Internal Revenue Code of 1986. It closed a lot of loopholes and greatly simplified our income tax. It was far from perfect, but it was a great leap forward. Since then, we have lost a lot of ground.