low income from CRP, tax exempt?

Question

Hi, I and my brother inherited some land that is in CRP (conservation reserve program). They payment they give each year is about 9,500$, for both of us as its in a trust. We already paid 2.500$ in property taxes. I was wondering if we had to pay oe even file an income tax return, as it is our only income. I know the low income exemption is 8,450$, but does anyone know if my situation is different. I don't know where else to ask, except an accountant, which I can't afford. Thanks very much for any help.

Hi, Thank for responding. You said some of my information was a bit confusing, I'll try to clarify. The trust is set up for us, by my great uncle, and I believe is just a figurehead as we are the sole trustees and there is no no one else involved. The land is held by the trust, but as I said the trust is just us. We have a checking account ,in both of our names,which we deposited the CRP payment into and paid the property taxes out of. The payments are made out to the trust, with us listed as trustees also on the check. I'm not sure about a K-1 or rental expenses? I know next to nothing about this we are both 19 and have never dealt with any of it before. Do you think we will be required to pay taxes? If so do you have any idea of roughly how much? Thank you so much for information. Adam

Answer 1

The $8,450 floor is for earned income. For unearned income it's $850. So, yes, you must file.

Answer 2

Adam - you inherited land in CRP, so it cannot be developed as anything other than farmland, right? You say it's in a trust. You also said that you paid $2,500 in property taxes, presumably to the county in which the land lies. You don't really know the legal status of the structure - it sounds like you're confusing a 'Deed of Trust' with a 'Trust'. A 'Deed of Trust' is used to describe ownership of real property (land, buildings, etc.). A Trust is a legal document that creates something similar to a corporation except that its purpose is more akin to conservation of assets rather than doing business. A Legal Trust would have Trustees identified, who would be responsible for all the legal forms, such as a K-1. If there is such a trust, then IT would be paying the property taxes (an aha! moment) as an expense of the trust. So I believe there is no Trust in existence, just ownership papers.

So, what do we have here? If your Uncle died and left you the land (or otherwise gave you the land), so the CRP generates income for you, then it's unearned income (i.e., you didn't have to do any work to 'earn' the income). If you and your brother share the money equally, then each of you claim $1250 in property taxes and show $4,750 in income from the CRP. Which form to use, I don't know. You could find / beg / borrow a copy of the 2006 tax software (turbotax, H&R Block, IRS website) and model the 2006 return to see where the numbers would go. Given that we are now in June, and the tax returns were due on April 15, you may want to contact the IRS and ask what procedure to follow. You will probably have to file a 1040 and other forms, and then see where you go.

If you and your brother are still in school, and claimed on your parents' returns as full time students, then you need to talk to them and ask if they included this money on their return. There's no point in paying the taxes twice.

You can go to the IRS web site to learn about the different tax rates and calculate the potential tax liability. You can also learn what other forms you would have to file, as trustees. But it's not common for trustees to be the beneficiaries of the trust. So I think there's a vocabulary problem here.

The question seems much simpler on the surface, but there are many nuances which could apply, depending on other facts not provided in your question.

Answers are free. Mind reading very expensive.

Answer 3

I assume you are over 18 and under 65, single, and not a dependent.

Some of your information is a bit confusing. The trust holds the land and you get the CRP income. Then the trust should have paid the property tax on the land.

You will receive a K-1 from the trust. It likely will show rental income. The taxes paid on the property can be deducted as a rental expense.

So although you must file a tax return, if your income after expenses is below $8,450 for 2006 ($8,750 for 2007), you will owe no income tax.

Answer 4

Please clarify what is in the trust and what do you own. The trust may do a tax return if the trustee knows what he is doing. In that case you will get a K-1 for any income from the trust. If you get direct payments as indicated it would appear that you have income above the $850 limit to file a return. It is likely that you will not owe any tax, but you have not provided enough information to determine that.