As we move toward a new year, many are past ready to say goodbye to 2020. While we’ve all experienced the uncertainty – some more than others – that life during a pandemic poses, it’s a reminder that planning for a rainy day is age-old wisdom that never goes out of style.
John Barnard, owner of John M. Barnard, CPA, PA, a certified public accounting firm in Statesville, is one of two appointed directors on the Carolina Farm Credit Board of Directors. As a tax specialist who works extensively with the agricultural community, he advises kicking off the New Year with a plan. Part of that plan needs to include a concerted effort to review your plan periodically through the year to help you stay on track.
Here are John’s tips for tax planning strategies in 2021:
- Maintain good records. You don’t need an elaborate system but some type of system helps. Consider Quickbooks or another software program that works for you. See other options in our blog, “Keeping Good Farm Records.” Another option may be to work with a CPA firm who can help you with monthly bookkeeping and accounting services along with helpful tax advice.
- Plan for upgrades. Consider what large equipment purchases or other major expenditures you may need as part of your operation and plan accordingly. “The key is to buy things you need and can use,” says John. “Plan upgrades and don’t make spur-of-the-moment purchases just for tax purposes.”
- Pay attention to tax laws and new developments. While tax laws typically don’t change much before, during, and after an election year, there may be some movement in Congress toward new laws at the end of 2021 to go into effect in 2022. Stay on the lookout for what begins to happen in the New Year. Regardless of who wins the presidential election in 2020, somewhere along the line we are going to have to pay for all the stimulus money that has gone out. There is no free lunch. Tax rates are likely to increase in the future.
- Plan for the future of your operation. This includes two major considerations: your retirement and a succession plan.
Retirement planning: Most farmers will tell you their retirement is usually when they move from above the ground to below the ground, but the reality is that there needs to be some plan for retirement. While contributing to some retirement tools can be an important end-of-the-year strategy, it makes sense to contribute throughout the year to a traditional IRA, ROTH IRA, SEP, or to a 401k, if you have off-farm income.
As a reminder, while you work on preparing your 2020 tax returns, you have until April 15, 2021, or the date you submit returns, whichever comes first, to set aside retirement funds for the 2020 year. Your financial planner or tax adviser can help you decide which tool may be most advantageous for you.
If you don’t have any retirement tools in place, the beginning of the year is a good time to set up something. You may only be 40 years old, but 60 gets here faster than you think.
Succession planning: In addition to retirement planning, the transition of the farm operation to a family member is another consideration to start thinking about. Most people want to pass their farm along to the next generation. Whether the entire operation transfers to a family member, or you sell the operation but keep the land, or you wish to determine how to set up arrangements so that both on-farm and off-farm children are rewarded without disrupting the farm, planning can be complex. There also are tax consequences when it comes to transferring assets. For those nearing middle years, estate planning is important. The pandemic has underscored that. Transition and estate planning takes time and the beginning of the New Year is a reminder to get started. As part of your planning, make sure you have a will and use other vehicles to meet your needs based on your circumstances. When an event occurs it’s too late to make a plan.
- Review Your Plan Quarterly. Don’t treat the plan like a New Year’s resolution that is forgotten in a week or a month. When you have your plan in place, review it on a regular basis to stay on track and to make any necessary adjustments. If you need to make an auto correction and get back on track with recordkeeping, for example, it’s easier to do during the first quarter rather than at the end of the year.
- Make time for fun! Everyone needs to have a little fun doing what they are doing. John says he loves the advice he was given long ago; he even has a sign on his desk as a reminder. “Love what you do, know that it matters, and have fun doing it.” Most farmers love what they do and they know it matters and I hope they are finding some ways to have some fun doing it.
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By Leah Chester-Davis