2-05

Source: Donald J. Breece, Farm Management Specialist, OSU Extension

This article lists a number of items affecting this years income tax filing and next years tax management. IRS forms and publications are available by calling 1-800-829-3676 or by contacting www.irs.gov/formspubs .

1. The 2004 Tax Relief Act extended the child tax credit through 2010. The credit is $1000 per qualifying child, under 17 years of age on the last day of the tax year.

2. The Standard Deduction has been changed to eliminate this part of the "marriage penalty" by making the married S.D. twice the single. The standard deduction for 2004 is $4850 single, $9700 married filing joint, $4850 married filing separate, and $7150 for head of household.

3. The "marriage penalty" remains for higher incomes due to bracket percentage amounts.

4. The ordinary income tax rates for 2004 are: 10%, 15%, 25%, 28%, 33%, and 35%.

5. The 10% tax bracket amounts are Single $7,150 and Married $14,300. The 15% tax bracket amounts are Single $29,050 and Married $58,100.

6. The core capital gains rates have dropped to 5% for ordinary income tax brackets up to 15%, and a maximum of 15% capital gains rate for all others.

7. Dividends were previously taxed at ordinary income tax rates, now dividends are taxed at the capital gains rates of 5% or 15%.

8. Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 are effective through 2010, but sunsets in 2011, thus repealing all of the changes.

9. The Federal Estate Tax Exclusion amount is $1,500,000 per person in 2004 and 2005. It raises to $2,000,000 in 2006 and $3,500,000 in 2009. The Federal Estate Tax is repealed for 2010, but returns with a $1,000,000 exclusion in 2011. The Gift Tax Exclusion remains at $1,000,000 for each year. The annual amount that can be given per person/year without filing a gift tax return is $11,000.

10. The law changed for 2004 and future years relating to Income Averaging for farmers and the Alternative Minimum Tax. In computing AMT, a farmer's regular tax liability is now determined without regard to income averaging. In prior years, AMT eliminated much of the tax savings a farm would have realized from filing a Schedule J for Income Averaging.

11. The standard mileage rate for business use of vehicles is 37.5 cents per mile in 2004 and 40.5 cents for 2005. In 2004 a business may use the standard mileage rate for up to 4 vehicles (was up to 2).

12. The additional first year depreciation of 50% (or elect 30%) is used for property placed in service in 2004 and was not extended by new legislation. Qualifying property must be original use (new), MACRS recovery up to 20 years (most farm property), or a qualified leasehold improvement.

13. IRC Section 179 expensing is available for both new or used qualifying business property (machinery, breeding livestock, single purpose livestock or horticulture structures, field tile, grain bins). The amount was raised to $100,000 (indexed to inflation) and the increased amount has also been extended through 2007. In 2008 Section 179 returns to $25,000. In 2004 the limit is $102,000 and is increased to $104,000 in 2005. There is a qualifying investment limitation of $400,000 per year (indexed to inflation).

14. Net income from 4-H and FFA projects are subject to income tax, but generally are not a trade or business, thus are not subject to self employment tax. However, since a dependent, the young person may be subject to a limited standard deduction that can not exceed the greater of $800 or $250 plus the individual's earned income.

Computerized Farm Record Keeping with Quicken 2005 Self Study Manual Now Available

Source: Barry Ward, Leader, Production Business Management, OSU Extension Department of Agricultural, Environmental and Development Economics

The newly updated Computerized Farm Record Keeping with Quicken 2005 self-study manual is now available as on online bulletin in pdf format at: http://ohioline.osu.edu/b920/ This bulletin has been developed as a result of the demand from Ohio producers seeking assistance on using an inexpensive, easy to use program for farm record keeping. The objective of this manual is for Quicken users to begin keeping farm records on their home computer by following the step-by-step procedures outlined in each chapter. The manual will also be useful to experienced Quicken users as they upgrade to a newer version and continue to improve their record keeping skills.

This manual has been written for Quicken 2005 Basic. We will make every attempt to keep the manual updated with each new version. Past and future manuals and updates will be available on the OSU Agricultural, Environmental and Development Economics at: http://aede.osu.edu/ .

A commonly asked question is, “Which version of Quicken should I get for my farm records?” Quicken offers four different versions for 2005, Quicken 2005 Basic, Quicken 2005 Deluxe, Quicken 2005 Premier and Quicken 2005 Premier Home and Business. While each product has different features, our experience is that the basic program, Quicken 2005 Basic, will perform most farm record keeping tasks adequately. We also receive questions about the use of the Quicken Home & Business version versus the use of basic Quicken for farm record keeping. If your farm business requires you to create customer invoices and statements and to have accounts for payables and receivables, you need to be using the Home & Business version of Quicken. The Home & Business version can also generate accrual-based profit and loss statements if the program is set up and used properly throughout the year. However, for the majority of cash-basis farm record keepers, the basic version of Quicken will provide more than enough information for management decisions and income tax planning.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 included a provision that permits self-employed individuals or individuals who are employees to establish Health Savings Accounts (HSAs) beginning in 2004. HSAs are custodial accounts or tax exempt trusts that are created to pay qualified medical expenses for the account holder, their spouse and dependents. Contributions to HSAs are tax deductible if made by an eligible individual or not included in an individual's gross income if contributions are made by their employer. Distributions from the HSA are tax-free if they are used to pay for qualified medical expenses.

To qualify for an HSA, the individual must be covered under a high deductible health plan (HDHP). A qualifying HDHP for 2005 must have an annual deductible of at least $1,000 for individual coverage and $2,000 for family coverage and a maximum annual out-of-pocket expense limit of $5,100 for individual coverage ($5,000 for 2004) and $10,200 for family coverage ($10,000 for 2004).

The maximum annual contribution to an HSA for 2005 is 1) the lesser of the annual deductible of the HDHP or 2) $2,650 for individual coverage ($2600 for 2004) or $5,250 for family coverage ($5,150 for 2004). Individual policyholders and covered spouses who are 55 or older are allowed an annual catch-up contribution. For 2005, the catch-up amount is $600 ($500 for 2004) and will increase $100 each year until it reaches $1,000 for 2009 and thereafter.

An eligible individual can establish an HSA with a qualified trustee or custodian by executing the agreement in Form 5305-B for a trust account or Form 5305-C for a custodial account. A qualified trustee or custodian is any bank or insurance company, or any other person already approved as a trustee or custodian for IRAs or Archer MSAs. The trustee does not have to be the provider of the high-deductible health coverage.

Contributions can be made to an HSA at any time prior to the filing of the individual's tax return, not including extensions. Contributions made by an individual are deductible in determining the individual's adjusted gross income; that is, they are deductible “above the line.” Form 8889 must accompany the Form 1040 to claim the deduction. A self-employed individual will be able to claim the self-employed health insurance deduction in addition to the deduction for contributions made to an HSA.

There is no “use-it or lose it” provision for HSAs so any unused contributions can be carried forward and used for eligible medical expenses in later years. Any investment earnings of the HSA are not taxable. Any distributions used for non-medical expenses are taxable and subject to a 10% penalty.

To determine if any HSA will work for your situation, check with your tax advisor. More information concerning the provisions affecting HSAs is available in IRS publication 969.

The purpose of this report is to review the evidence on the profitability of technical analysis. To achieve this purpose, the report comprehensively reviews survey, theoretical and empirical studies regarding technical trading strategies. We begin by overviewing survey studies that have directly investigated market participants' experience and views on technical analysis. The survey literature indicates that technical analysis has been widely used by market participants in futures markets and foreign exchange markets, and that about 30% to 40% of practitioners appear to believe that technical analysis is an important factor in determining price movement at shorter time horizons up to 6 months. Then we provide an overview of theoretical models that include implications about the profitability of technical analysis. Conventional efficient market theories, such as the martingale model and random walk models, rule out the possibility of technical trading profits in speculative markets, while relatively recent models such as noisy rational expectation models or behavioral models suggest that technical trading strategies may be profitable due to noise in the market or investors' irrational behavior. Finally, empirical studies are surveyed. In this report, the empirical literature is categorized into two groups, "early" and "modern" studies, according to the characteristics of testing procedures. Click http://www.farmdoc.uiuc.edu/agmas/reports/04_04/AgMAS04_04.html to view the report as a web page, or http://www.farmdoc.uiuc.edu/agmas/reports/04_04/AgMAS04_04.pdf to view the report in PDF format.

Copyright 2004 by Cheol-Ho Park and Scott H. Irwin. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

Source: Donald J. Breece, Farm Management Specialist, OSU Extension Center-Lima

The two most important tools for grain producers in 2005 appear to be a sharp pencil and calculator. Grain prices are much lower than last season, nitrogen is at historically high prices, and there is the new risk of the Asian Soybean Rust.

Dr. Gary Schnitkey, University of Illinois Farm Management Economist , has forecast next years returns to be near the 1998-2000 levels. He also indicated that corn variable costs would be as much as $9 more per acre and soybean costs up $5 for Illinois farmers. These costs do not include any possible spraying for rust, which may add $20-25 per acre, per spray application. Gary 's article may be found the FarmDoc site: http://www.farmdoc.uiuc.edu/manage/newsletters/fefo04_19/fefo04_19.html .

Dr. Bob Nielsen, Purdue Corn Specialist, suggests that farmers should apply nitrogen based upon realistic yield goals, not upon record yields. Credit all nitrogen you can from all sources, to include last years crop and manures. Evaluate the cost of nitrogen sources based upon the cost per actual pound of N. Given high nitrogen prices, consider shaving rates up to 10% if cash flow or fertilizer is in short supply.

Look at crop insurance for soybean acres to protect against losses due to a possible, overwhelming effect of soybean rust (see last months article). Put together a crop budget for 2005, considering all costs that must be paid by production. Consider sensitivity of both yields and prices given production costs. Ohio has a long list of budgets. These may even be used on your computer as an interactive spread sheet. http://aede.osu.edu/People/Moore.301//index.htm is the link to OSU Budgets.

Many states have added budgets to a national data base, maintained at the National AG Risk Education Library: http://www.agrisk.umn.edu/Budgets/. Perhaps, you may find other formats, from other states, that even more closely match your style of analysis.

Source: Donald J. Breece, Farm Management Specialist, OSU Extension Center-Lima

The first version of the 2005 Premium Calculator is now ready for use at http://www.farmdoc.uiuc.edu/cropins/index.html This calculator provides estimates of insurance premiums for federally subsidized insurance products for all counties in 12 Midwest states, including Ohio . These estimates are preliminary because base prices and price volatilities will not be known until the beginning of March. Best estimates of these parameters are placed in the model.

Information on group products has been revised ( http://www.farmdoc.uiuc.edu/cropins/group_crop_products.html ). This information includes calculators that estimate premiums and average payments for alternative group products.

The above information will be revised as more information about base prices and volatilities become available.

Rethinking the Use of the Pick-up Truck
Source: Chris Bruynis, Extension Educator, Wyandot County

With energy costs increasing and the expensive costs associated with truck repairs, are the days of 4 wheel drive muscle trucks a thing of the past in the farm landscape? Probably not, but evaluating truck usage and associated costs can provide some excellent information that can save the business money long term. One such analysis can be found at http://www.noble.org/Ag/Farms/FromTheFarm0104/index.html . Although this example is associated with livestock and pastures, a similar analysis could be useful for producers in all types of farm enterprises.

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Information presented above and where trade names are used, they are supplied with the understanding that no discrimination is intended and no endorsement by Ohio State University Extension is implied. Although every attempt is made to produce information that is complete, timely, and accurate, the pesticide user bears responsibility of consulting the pesticide label and adhering to those directions.

All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.

Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Keith L. Smith, Director, Ohio State University Extension.