A gift of raised agricultural commodities to children may be an effective method of shifting income to children to help pay for college costs. Normally, on the gift of an asset, the holding period carries over from the donor to the donee. However, with gifts of raised inventory given from a farm proprietor, the character of the asset changes from inventory to investment or capital asset status in the hands of the donee child. Accordingly, the most conservative approach to assure qualification for long-term capital gain status is to have the child hold the grain at least 12 months before sale.

Specific Details

The taxpayer reduced their taxable income by $5,000 by gifting agricultural commodities to his child. Since the taxpayers income was taxed at the 35% tax bracket, the income reduction may decrease their income taxes by $1,750 ($5,000 x 35%).

Potential Savings

If you are in a combined (federal and state) tax bracket of 35% and your childs tax bracket is 0%, you could reduce your taxes up to $350 for every $1,000 of agricultural commodity income you could shift to your child.