Can I reduce my tax reliability by purchasing farm equipment here on my farm? Thinking about using some of my 401k funds to make the purchase, then recoup taxes

[mawestcott]

If so, what forms from TurboTax do I need?

[Carl]

Typically, equipment used in farming activity for the purpose of producing income is listed in the assets section where it's capitalized and depreciated over time.

If you're taking money from your 401(k) for this and you're not of retirement age yet, you can expect to pay a 10% penalty for the early withdrawal unless the money is used for a qualified exception. (Farming or any other business equipment purchase is not a qualified exception.) Additionally, the withdrawal will be subject to regular income tax regardless of what you use that money for. (assuming it's not a ROTH retirement account of some type).

Without more details about your farming activity, that's the best I can do at this point.

[mawestcott]

Carl

Sorry that I could not explain more, I was limited to amount of characters I used in my question.  I am 70 and have been retired for 7 years.  I have never had to get into my 401K as I have other savings I have used to supplement if needed.  

I own a small farm, 64 acres, and have thought about going into cattle business.  I just thought if I were to buy farm equipment, it might be a good time to take a small amount out of my 401k and then write off the purchase to get back some of the withheld taxes.  I usually do not have to pay any taxes, and file with just standard deductions (no itemized deductions).  Because of that, just seems to my advantage to buy and then get back as much as possible.  

Don't know if that clears things up a little better for you.  Thanks for your reply!

[Carl]

At your age, there's no need to be concerned with early withdrawal penalties.

Normally when I make reference to websites on tax topics, I prefer to reference an IRS or other government web site to ensure the information provided is the most current. But in this case the best I can find that explains things in plain english for us common folks is on the Motley Fool website at https://www.fool.com/retirement/plans/401k/required-minimum-distributions/

It used to be that at age 70 1/2 you were required to take a minimum distribution. I see now that it's changed to age 73. What you do with the money withdrawn from your retirement account has no affect on it's taxability. You will be taxed on that money anywhere from 0% on up; depending on what tax bracket you fall in based on the total of all income from all sources.

[Opus 17]

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@mawestcott wrote:

I own a small farm, 64 acres, and have thought about going into cattle business.  I just thought if I were to buy farm equipment, it might be a good time to take a small amount out of my 401k and then write off the purchase to get back some of the withheld taxes.  I usually do not have to pay any taxes, and file with just standard deductions (no itemized deductions).  Because of that, just seems to my advantage to buy and then get back as much as possible.  

When you buy equipment for a farm or business with an expected life of more than 1 year, that is an asset.  Assets must generally be depreciated over their useful life.  In other words, if you buy a tractor with a 15 year life, you would deduct 1/15th the cost per year over 15 years as a farm expense.  (It's a bit more complicated than that, but that's the general idea.)

There are several ways of deducting the entire cost in the year you buy the asset.  These are applicable to business in general, but I don't know if the rules for farm assets are different.  There is section 179 depreciation and "bonus" depreciation (two different things).  Items costing less than $2,500 can be treated as an expense, and items costing less than 2% of the business revenue for the year can be treated as an expense instead of an asset.  If you use section 179 or bonus depreciation to deduct the entire cost all at once, and then stop using the asset for business before the end of the recovery period, you have to repay or recapture the depreciation deduction.  (For example, if you buy a tractor with a 15 year life expectancy and use section 179 to depreciate it all at once, then you stop using it for farming in 5 years, you have to repay 10/15ths of the depreciation deduction.  "Stop using the asset in your business" includes, you stop farming due to age or injury, or unprofitability, or you sell the tractor to someone else even if you keep on farming.

Certainly, if you have a farm and you buy equipment, that will offset any income from the farm.  You may be able to deduct a loss.  Your tax return would include the income from 401k withdrawal, that could be combined with a loss on the farm to reduce your overall net taxable income.  However, there are some limits to deducting farm losses.

You may want to see a local tax professional.