Will farmers and ranchers be taxed outside agriculture?
As the inevitable changes in the Biden administration’s tax policy take shape, one thing remains constant: Agriculture is under attack.
The House Ways and Means Committee, which has jurisdiction over taxation, released a bill on September 13, 2021, which will have a disproportionate impact on agriculture.
Currently, a person can transfer a total of $ 11.7 million by gift or through their estate essentially tax-free and any amount greater than that imposed by the federal government. This amount was increased by the Tax Cuts and Jobs Act of 2017 and is expected to expire in 2026, meaning the exemption level would drop to $ 5 million per person, adjusted for inflation to about $ 6 million per person. The currently proposed legislation, however, would move the date of the reduction to January 1, 2022. The tax on the part of an inherited farm or ranch that exceeds the exemption level is 40% and must be paid within nine months. of death.
While this amount is often discussed simply in terms of inheritance taxes, it also includes any donation above the annual donation exemption. Currently, a person can give $ 15,000 each year to an unlimited number of beneficiaries without being taxed. Anything greater than this uses part of the lifetime exemption. For example, a gift of $ 20,000 to one person in a single year will reduce the total lifetime gift and inheritance tax exemption by $ 5,000.
While these numbers may seem high at first glance, especially for those familiar with the low liquidity of farming operations, they include the value of land and other illiquid assets such as equipment. In other words, this amount includes the total value of a farm or ranch, not just money in the bank. Typically, the most valuable asset on a farm or ranch is the land itself, which typically continues to appreciate over time. In many parts of the country, buzzing real estate markets inflate land prices to such an extent that a lowered exemption level is likely to trigger gift and inheritance taxes when transferred by gift or inheritance.
Another major concern for agriculture under this administration is a grassroots change, and agricultural advocates across the country collectively breathed a sigh of relief when the proposed legislation did not contain such a change. The proposed legislation is still the subject of several rounds of debates and revisions, so the threat of a basic change has by no means disappeared.
“Base increase” means that when the property passes on death, its value is adjusted to the current fair market value. When a property is sold, the owner is taxed on the difference between the current market value and his “basis” in the property, that is, the value of the property at the time he acquired it. This difference is called a capital gain or loss, which is then taxed federally. An increase in the tax base reduces the capital gains realized by the heiress generation because the calculation is based on the appreciation of the land during their ownership rather than since the original family purchase. Since land generally appreciates over time, an elimination or increase in the tax would have a disproportionate impact on generational transfers in agriculture.
Although the bill does not include this change, it is not completely excluded. The proposed legislation is not yet set in stone and such a change can easily be added through the extensive review process before congressional approval. Additionally, Biden’s “American Plan for Families” released on April 28, 2021 supports the limitations of the current base.
While the current elimination of changes to increase the base is a step in the right direction, changes negatively impacting the generational transfer of farms and ranches are inevitable under current administration. Property taxes can bankrupt a farm, so farmers and ranchers must reassess their estate plans to protect their farms for future generations. Hopefully our country will realize the dire consequences of imposing agricultural bankruptcy before it is too late. In the meantime, estate planning is one of the most powerful tools we can use to keep the industry alive for the next generation.
Merck is a partner attorney at Budd-Falen Law Offices, LLC and focuses primarily on property rights, environmental law, and natural resource law. Budd-Falen Law Offices, LLC, has attorneys licensed to practice law in Colorado, Idaho, Illinois, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Texas and Wyoming.