Hello, northeast Ohio!
Typically, as we move into the final quarter of the year, farm managers will start to examine their financial records in order to estimate the potential net farm income for the year and make plans on how to avoid the proverbial “tax man.” All indications point to positive income returns to the dairy sector for 2022.
The October WASDE (World Agricultural Supply and Demand Estimates) released Oct. 12 forecasted the 2022 all milk price at $25.60 per hundredweight and estimates the 2023 all milk price at $22.90 per hundredweight. The remainder of the year looks favorable due to the shrinking U.S. dairy herd and increasing demand for dairy products.
Additionally, operations may have seen increased revenue due to cash grain sales in spite of rising input costs. So, if 2022 is looking profitable, what can I do to reduce my income tax obligation?
For many farm managers, it typically means prepaying expenses for the upcoming year or by investing in buildings, machinery and equipment.
While these strategies are all useful as tax mitigation strategies, I would remind you that it is not a bad thing to have a profitable year and to pay taxes. As an added bonus, earning income and paying self-employment taxes as a farm manager has an impact on future social security retirement benefits.
Social security
For many farmers, social security will make up a sizable portion of their eventual retirement income. To qualify for future benefits under Social Security, an individual must earn 40 quarters or 10 years of wages or net profits.
For 2022, the minimum earnings per quarter is $1,510. Individuals can earn up to four credits per year, making the total minimum earnings equivalent to $6,040 for 2022. In 2023, the quarter of coverage will increase from $1,510 to $1,640.
Getting to 40 credits makes you eligible for benefits, but how much you will receive for retirement benefits is based on your 35 highest years of earnings. If you pay in at the minimum level, your social security retirement will be minimal.
In high profitability years, managers should maximize the wages or profit that is subject to social security tax to help boost their 35 high year average.
According to the Social Security Administration, the average (2023) social security income per month for a retired worker is $1,827 or $2,972 for a couple. If a retired couple has a family living of $70,000, then social security provides only 51% or $35,664 of the needed retirement income.
Investments
So, this leads to the question, how will you make up the remaining amount needed for retirement and account for inflation? So, if this year has been profitable for you, I would challenge you to examine ways to invest into retirement for you and your employees.
In fact, many would contend the best investment you can make for the junior partner of a farming operation is by putting money in their retirement account, early and often. Individuals can invest after-tax dollars into certificates of deposits, bonds, stocks and mutual funds which could serve as income sources for retirement.
Other plans
Individuals can also make contributions to traditional or Roth individual retirement accounts (IRA) to help fund their retirement years. The 2022 contribution limits for IRAs are $6,000 unless the individual is over 50. If over 50, the individual can contribute up to $7,000. Individuals need over $6,000 of earned income to be eligible to contribute to a traditional IRA.
Several vehicles exist for small businesses to use to help build retirement for both owners and employees. These include the Savings Incentive Match Plan for Employees IRA, 401(k) plans, Solo-401(k) plans and Simplified Employee Pension Plan. These plans allow for companies to make retirement contributions for employees as business expenses. In a time when labor wage inflation is increasing, having a retirement plan as part of your compensation package can be an excellent employee benefit.
Resources
So, as you crunch your year-end financial numbers, I would encourage you in consider beefing up your retirement accounts. As you do this, make sure to seek wise counsel from financial professionals.
I also encourage you to access this month’s Buckeye Dairy newsletter, which includes a retirement planning article, at dairy.osu.edu/newsletter/buckeye-dairy-news. More information about retirement choices for small businesses can also be found at irs.gov/pub/irs-pdf/p3998.pdf. Stay safe this fall and happy retirement planning!
