15.   Estimated Tax

What's New

Net Investment Income Tax. . For tax years beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. NIIT may need to be included when calculating your estimated tax. For more information, see Publication 505,Tax Withholding and Estimated Tax.

Additional Medicare Tax. For tax years beginning in 2013, a 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income over a threshold amount based on your filing status. You may need to include this amount when figuring your estimated tax. For more information, see Publication 505.

Introduction

Estimated tax is the method used to pay tax on income that is not subject to withholding. See Publication 505 for the general rules and requirements for paying estimated tax. If you are a qualified farmer, defined below, you are subject to the special rules covered in this chapter for paying estimated tax.

Topics - This chapter discusses:

  • Special estimated tax rules for qualified farmers

  • Estimated tax penalty

Useful Items - You may want to see:

Publication

  • 505 Tax Withholding and Estimated Tax

Form (and Instructions)

  • 1040 U.S. Individual Income Tax Return

  • 1040-ES Estimated Tax for Individuals

  • 2210-F Underpayment of Estimated Tax by Farmers and Fishermen

See chapter 16 for information about getting publications and forms.

Special Estimated Tax Rules for Qualified Farmers

Special rules apply to the payment of estimated tax by individuals who are qualified farmers. If you are not a qualified farmer as defined next, see Publication 505 for the estimated tax rules that apply.

Qualified Farmer

An individual is a qualified farmer for 2013 if at least two-thirds of his or her gross income from all sources for 2012 or 2013 was from farming. See Gross Income , next, for information on how to figure your gross income from all sources and see Gross Income From Farming , later, for information on how to figure your gross income from farming. See also Percentage From Farming , later, for information on how to determine the percentage of your gross income from farming.

Gross Income

Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from income tax. On a joint return, you must add your spouse's gross income to your gross income. To decide whether two-thirds of your gross income was from farming, use as your gross income the total of the following income (not loss) amounts from your tax return.

  • Wages, salaries, tips, etc.

  • Taxable interest.

  • Ordinary dividends.

  • Taxable refunds, credits, or offsets of state and local income taxes.

  • Alimony.

  • Gross business income from Schedule C (Form 1040).

  • Gross business receipts from Schedule C-EZ (Form 1040).

  • Capital gains from Schedule D (Form 1040). Losses are not netted against gains.

  • Gains on sales of business property.

  • Taxable IRA distributions, pensions, annuities, and social security benefits.

  • Gross rental income from Schedule E (Form 1040).

  • Gross royalty income from Schedule E (Form 1040).

  • Taxable net income from an estate or trust reported on Schedule E (Form 1040).

  • Income from a Real Estate Mortgage Investment Conduit reported on Schedule E (Form 1040).

  • Gross farm rental income from Form 4835.

  • Gross farm income from Schedule F (Form 1040).

  • Your distributive share of gross income from a partnership, or limited liability company treated as a partnership, from Schedule K-1 (Form 1065).

  • Your pro rata share of gross income from an S corporation, from Schedule K-1 (Form 1120S).

  • Unemployment compensation.

  • Other income not included with any of the items listed above.

Gross Income From Farming

Gross income from farming is income from cultivating the soil or raising agricultural commodities. It includes the following amounts.

  • Income from operating a stock, dairy, poultry, bee, fruit, or truck farm.

  • Income from a plantation, ranch, nursery, range, orchard, or oyster bed.

  • Crop shares for the use of your land.

  • Gains from sales of draft, breeding, dairy, or sporting livestock.

Gross income from farming is the total of the following amounts from your tax return.

  • Gross farm income from Schedule F (Form 1040).

  • Gross farm rental income from Form 4835.

  • Gross farm income from Schedule E (Form 1040), Parts II and III.

  • Gains from the sale of livestock used for draft, breeding, sport, or dairy purposes reported on Form 4797.

For more information about income from farming, see chapter 3.

Farm income does not include any of the following:

  • Wages you receive as a farm employee.

  • Income you receive from contract grain harvesting and hauling with workers and machines you furnish.

  • Gains you receive from the sale of farm land and depreciable farm equipment.

Percentage From Farming

Figure your gross income from all sources, discussed earlier. Then figure your gross income from farming, discussed earlier. Divide your farm gross income by your total gross income to determine the percentage of gross income from farming.

Example 1.

Jane Smith had the following total gross income and farm gross income amounts in 2013.

Gross Income

  Total Farm
Taxable interest $3,000  
Dividends 500  
Rental income (Sch E) 41,500  
Farm income (Sch F) 75,000 $75,000
Gain (Form 4797) 5,000 5,000
Total $125,000 $80,000

Schedule D showed gain from the sale of dairy cows carried over from Form 4797 ($5,000) in addition to a loss from the sale of corporate stock ($2,000). However, that loss is not netted against the gain to figure Ms. Smith's total gross income or her gross farm income. Her gross farm income is 64% of her total gross income ($80,000 ÷ $125,000 = 0.64).

Special Rules for Qualified Farmers

The following special estimated tax rules apply if you are a qualified farmer for 2013.

  • You do not have to pay estimated tax if you file your 2013 tax return and pay all the tax due by March 3, 2014.

  • You do not have to pay estimated tax if your 2013 income tax withholding (including any amount applied to your 2013 estimated tax from your 2012 return) will be at least 662/3% (.6667) of the total tax shown on your 2013 tax return or 100% of the total tax shown on your 2012 return.

  • If you must pay estimated tax, you are required to make only one estimated tax payment (your required annual payment) by January 15, 2014, using special rules to figure the amount of the payment. See Required Annual Payment , next, for details.

Figure 15-1 presents an overview of the special estimated tax rules that apply to qualified farmers.

Example 2.

Assume the same fact as in Example 1. Ms. Smith's gross farm income is only 64% of her total income. Therefore, based on her 2013 income, she does not qualify to use the special estimated tax rules for qualified farmers. However, she does qualify if at least two-thirds of her 2012 gross income was from farming.

Example 3.

Assume the same facts as in Example 1 except that Ms. Smith's farm income from Schedule F was $90,000 instead of $75,000. This made her total gross income $140,000 ($3,000 + $500 + $41,500 + $90,000 + $5,000) and her farm gross income $95,000 ($90,000 + $5,000). She qualifies to use the special estimated tax rules for qualified farmers, since 67.9% (at least two-thirds) of her gross income is from farming ($95,000 ÷ $140,000 = .679).

Required Annual Payment

If you are a qualified farmer and must pay estimated tax for 2013, use the worksheet on Form 1040-ES to figure the amount of your required annual payment. Apply the following special rules for qualified farmers to the worksheet.

  • On line 14a, multiply line 13c by 662/3% (.6667).

  • On line 14b, enter 100% of the tax shown on your 2012 tax return regardless of the amount of your adjusted gross income. For this purpose, the “tax shown on your 2012 tax return” is the amount on line 61 of your 2012 return modified by certain adjustments. For more information, see chapter 4 of Publication 505.

Estimated Tax Penalty for 2013

If you do not pay all your required estimated tax for 2013 by January 15, 2014, or file your 2013 return and pay any tax due by March 3, 2014, you may owe a penalty. Use Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, to determine if you owe a penalty. See the instructions for Form 2210-F.

Figure 15-1. Estimated Tax for Farmers

If you receive a penalty notice, do not ignore it, even if you think it is in error. You may get a penalty notice even though you filed your return on time, attached Form 2210-F, and met the gross-income-from-farming requirement. If you receive a penalty notice for underpaying estimated tax and you think it is in error, write to the address on the notice and explain why you think the notice is in error. Include a computation similar to the one in Example 1 (earlier), showing that you met the gross income from farming requirement.


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