Taxation and social security are complicated topics, and it can be challenging to understand how these issues relate to the farming community. Fortunately, with a bit of knowledge, we can demystify these topics and help farm owners and operators navigate the complexities of the tax code.
Social Security and Farming
Social Security plays an essential role in the financial lives of most Americans, and this is no different for farmers. However, it is necessary to know how Social Security interacts with farm income.
Taxation on Social Security Benefits
When you receive Social Security benefits and have other sources of income, you may be required to pay federal taxes on a portion of those benefits. To determine whether you need to pay taxes on your Social Security benefits, the IRS will apply a formula to your combined income.
Combined Income Calculation
Combined income is calculated by adding one-half of your Social Security benefits to your other income, including any tax-exempt interest. If your combined income exceeds a certain threshold, you will need to pay taxes on a portion of your Social Security benefits.
Income Thresholds and Taxation
If you file as an individual and your combined income is between $25,000 and $34,000, you may have to pay taxes on up to 50% of your Social Security benefits. If your combined income is above $34,000, you may have to pay taxes on up to 85% of your benefits.
For married couples filing jointly, the threshold is $32,000 if you only receive Social Security and $44,000 if you have other sources of income.
Earnings Limitations and Wages in Kind
Social Security also has an earnings limitations test that can affect farm operators and owners. If you are between age 62 and your full retirement age, and you earn more than a specified amount, your Social Security benefits will be reduced.
Social Security Earnings
In 2021, this limit is $18,960. For every $2 that you earn above this limit, $1 of your Social Security benefits will be withheld.
However, wages in kind, such as food and lodging, do not count toward this earnings limit.
Federal Farm Program Payments
If you participate in a federal farm program, the payments you receive may be subject to an earnings limitation test. The earnings limitation test applies to certain federal farm program payments, such as those administered by the Farm Service Agency (FSA).
FSA Payments
If you receive FSA payments, the test applies to you if your adjusted gross income (AGI) is above a certain amount. For example, if your AGI is above $900,000, you will not be eligible for certain program payments.
Off-Farm Income and Social Security Taxes
Social Security taxes are also levied on off-farm income, such as self-employment income. If you work outside of farming and have self-employment income, you will be required to pay Social Security taxes on your earnings.
Self-Employed
Self-employed individuals pay Social Security taxes through the self-employment tax, which is a combination of the Social Security tax and the Medicare tax.
Farm Rental Income and Social Security
If you earn rental income from a farm, the IRS will want to know whether you materially participate in the farm’s management. Material participation means being actively involved in the decisions made for the farm, such as deciding which crops to plant and how to market them.
Cash Rental Income
If you materially participate in the management of the farm, your rental income will be subject to self-employment taxes. However, if you do not materially participate, your rental income will not be subject to self-employment taxes.
Conservation Reserve Program Payments
If you participate in the Conservation Reserve Program (CRP), the payments you receive are exempt from Social Security taxes. CRP payments are designed to provide farmers with incentives to protect environmentally sensitive lands.
CRP Payments
If you receive CRP payments, you will not have to pay self-employment taxes on this income. This tax exemption can be helpful in reducing the overall tax burden that farmers face.
Conclusion
Farming and Social Security taxation may seem complex at first. However, with an understanding of these topics and how they intersect, farmers can make informed decisions and better manage their tax liability.
By staying informed and taking advantage of any available tax deductions and exemptions, farm operators and owners can optimize their tax situation and help secure their financial future.
Farming as a Lifelong Career
Agriculture is a rewarding and fulfilling career, yet it presents unique challenges when it comes to retirement planning. Unlike most occupations, farmers often do not have a fixed retirement age.
Some may choose to work well beyond what is considered a typical retirement age. Let us explore some of the challenges of farming past retirement age and how to maintain income through Social Security and supplemental means.
Challenges of Farming Past Retirement Age
Farming can be a physically demanding job, and the aging body might not be able to handle it. Many farmers experience physical complications such as arthritis and back problems and even the most basic farm tasks can become difficult.
To continue farming at an old age, it is essential to have assistance in managing day-to-day farm activities. If no assistance is available, farmers may need to consider downsizing their farm while keeping a portion of the land to continue generating income.
Continued Farm Income and Social Security Benefits
Continuing to earn income through farming does not necessarily have to interfere with Social Security benefits. Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) could be available to eligible farmers with disabilities, regardless of their age.
Also, Social Security benefits itself may not be affected by farm income as long as you do not exceed the set limit.
Types of Income from Farming
Revenue from farming comes in multiple forms, from selling crops or livestock to rental income. Rental income is especially helpful as it permits farmers to continue generating revenue from their farm without actively working on it.
At the same time, it offers benefits such as potential tax deductions and opportunities to defer income taxes.
Supplemental Income Strategies
Supplemental income serves as an essential backup plan to ensure continued financial support after retirement. One strategy for farmers is transitioning into a second career line that does not require physical labor and can be done from home.
Such a switch could mean working fewer hours and at a pace that is manageable in old age.
Social Security Earnings Limitations Test
To qualify for Social Security benefits, you must reach a certain covered earnings status and meet age criteria. However, if you exceed the earning limitations test, it may reduce your benefits.
Calculation of Earnings Limitations
The calculation for earnings limitations is complicated and rigorous. It includes the income earned from work before reaching full retirement age and calculates the number of months worked before an individuals full-time retirement age.
The adjusted gross income (AGI) is also calculated and used to determine the reduction of Social Security benefits.
Consequences of Exceeding Earnings Limitations
If earnings exceed the set limit and an individual is not already receiving Social Security benefits, their retirement benefits will be reduced. For those who receive Social Security benefits, their monthly payout may also be reduced if they exceed the earnings limitation.
Social Security administration will reduce $1 for every $2 earned above the set limit.
Exceptions to Earnings Limitations
There are some exceptions to the earnings limitations test, which may permit full Social Security benefits to continue without reduction, regardless of any earnings above the limit. One significant exception is the initial year of Social Security application, in which reduced Social Security benefits may occur if income exceeds the limit.
In conclusion, the fluidity and longevity associated with the agriculture industry present many challenges when planning for retirement. However, it is comforting to know that the farming community has many options available, from receiving Social Security benefits to finding supplemental income sources.
Farmers can take full advantage of these options by staying informed and planning for retirement early on, contributing to a comfortable and rewarding retirement period. Farming is a rewarding career path, but it poses unique challenges to retirement planning.
Farmers may work beyond retirement age, and this could affect their Social Security benefits. To maintain a stable income, farmers can explore supplemental income sources.
The Social Security earnings limitation test has some exceptions, and farmers could take advantage of these rules. It is essential for farmers to stay informed and plan for retirement early on to ensure a comfortable and fulfilling retirement period.
While the career path may present a few hurdles, farmers can overcome them by being proactive and taking advantage of available resources.