One question I get asked is how much the IRS collects in taxes. The IRS recently released the 2020 fiscal year data, and it's a bit surprising.
When George Bush uttered those famous words, "Read my lips, no new taxes," the IRS collected $1 trillion in taxes. Ten years later, it was $2 trillion in taxes. Twenty years later, the IRS collected $3.493 trillion in taxes. Individuals account for 90%, and businesses account for 10%. Keep in mind the government spent $6.6 trillion for the 2020 fiscal year, creating a huge deficit.
Tax proposals seem to be coming at us weekly, and it's difficult writing an article that could become outdated before it's published. However, President Biden released his budget and revenue proposals, referred to as the "Green Book." It's a glimpse into the administration's future tax proposals.
-- Raising the corporate tax rate from 21 to 28%. Over the past few years, many farming corporations have switched over to S Corps. A tax rate increase may be the push for others to make the S election, as well.
-- Increase top marginal tax rates from 37 to 39.6% for singles earning more than $452,700, and married filing joint earning more than $509,300.
-- Increase long-term capital gains and qualified dividend tax to 39.6% for those with $1 million or more in taxable income. This would only apply to capital gains and dividends once the $1 million threshold is reached. More alarming, the top rate would be effective April 28, 2021.
-- Implement a wealth transfer tax. Transfers of appreciated property would be subject to capital gains tax to the extent realized gain exceeds $1 million. Realized gain is the difference between fair market value and adjusted basis of the asset.
The transfer tax would apply to transfers during lifetime or death, and the $1 million lifetime exemption could be shifted over to the spouse if unused (portability). The transfer tax appears to apply to all appreciated property including land, equipment and grain inventory. It also applies to trust or partnership distributions.
Payment of the transfer tax related to certain businesses, such as farms, can be made over a 15-year period ... subject to security (i.e., lien). And, if property continues to be family-owned and operated, no tax would be due until the business was sold or ceased to be family-owned/operated. However, family is not defined, and there's no mention if interest would accrue until the recognition event. The wealth transfer tax would be effective starting in 2022.
-- 1031 exchanges would be limited to deferring $500,000 of gain per person per year (cumulative throughout the year). It is unclear if this would apply to property sold in 2021 but replacement not acquired until 2022.
-- Certain limited partners and S Corp shareholders who are materially participating would be subject to SECA (self-employment) tax on the distributive share. This is a significant shift in tax law and may eliminate the benefits of farming under an S corp.
I know what you are thinking. Will this become law? The short answer is not all of it. However, this has the support of President Biden and presumably the Democrats in Congress. I can't stress how disruptive and detrimental these proposals could be to farming. It's clear that many in Congress have no idea what it takes to be a farmer.
-- DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota.
-- Read Rod's "Ask the Taxman" column at about.dtnpf.com/tax.
-- You may email Rod at email@example.com.
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