Mythbusters Part 1: Farm Tax General Edition

Tax season is here and it’s time for producers to file taxes for their operations. To help navigate the challenges of tax filing, USDA has partnered with experts around the country to provide tips and resources for taxes related to USDA programs. In this two-part Mythbusters series, our experts will address some common misconceptions about tax filing.

Jeffrey Tranel is an Extension Specialist with Colorado State University. He also works with the National Farm Income Tax Extension Committee. Here are some common myths that Jeffrey has identified about farm taxes and how to avoid making filing errors.

Myth #1 - I do not have to report my barter income.

If you're paid for your work in farm products, other property, or services, you must report as income the fair market value of what you receive. The same rule applies if you trade farm products for other farm products, property, or someone else's labor. This is called barter income. For example, if you help a neighbor build a barn and receive a cow for your work, you must report the fair market value of the cow as ordinary income.

Myth #2 - I am past the age where I need to file a tax return.

If you are a U.S. citizen or resident alien your filing obligation depends on your gross income, your filing status, your age, and whether you are a dependent. If you had taxable income in 2022 of $12,950 (if single) or $25,900 (if married filing jointly) or more, you must file a tax return. If you are a dependent of another person, the minimum dollar amounts for filing are much less. IRS publication 501 provides more information.

Myth #3 - I can claim my pet or someone who is not my relative as a dependent on my tax return.

No. A dependent must be human. The term “dependent” means a qualifying child or a qualifying relative. There are five tests used to determine if a child is your qualifying child: (1) relationship, (2) age, (3) residency, (4) support, and (5) joint return. Likewise, there are specific tests to determine if another person is a qualifying relative.

Myth #4 - When I move into a higher tax bracket, then ALL my income subject to tax is taxed at this higher rate.

The U.S. tax code uses “marginal” tax rates. This means that only the portion of taxable income that falls within the range of income for a specific marginal tax rate is taxed at that rate. For example, a single taxpayer had $74,500 of taxable income (after all deductions) in 2022. The amount from $0 to $10,275 is multiplied by 10%. The amount greater than $10,276 but less than $41,775 is multiplied by 12% plus the amount of tax liability computed from the lesser amount. ($1,027.50). The amount greater than $41,776 and not over $89,075 is multiplied by 22% plus $4,807.50. Thus, the federal income tax for this taxpayer would be ($74,500 - $41,775) times 22% plus $4,807.50. The bullet points below break out the computations:

• ($10,275 X 10%) = $1,027.50
• ($41,775 - $10,275) = $31,500 X 12% = $3,780
• ($74,500 - $41,775) = $32,725 X 22% = $7,199.50
• Total Tax Liability = $1,027.50 + $3,780.00 + $7,199.50 = $12,007

Stay tuned for the next installment in this two-part series in which farm employee tax misconceptions are cleared up. More information about taxes and USDA programs is available on the Taxes and USDA Programs webpage.