In March, President Joe Biden released his proposed federal budget of $5.8 trillion. That is a 7% increase in spending over current levels. Along with the budget, President Biden released the 2023 Greenbook. The Greenbook details how the president wants to pay for the increased spending through various taxes. Although it's not law, it is a glimpse into the Biden administration's tax policy. Let's review some of the provisions in the Greenbook that impact agriculture.
For individuals, the Greenbook proposes increasing the top tax rate for individuals earning over $400,000 ($450,000 married) to 39.6%. It also calls for an increase in capital gains rates for income of more than $1 million to 39.6%.
Once again, the Greenbook targets Section 1031 exchanges. The proposal allows deferral of gain on 1031 transactions up to an aggregate $500,000 per taxpayer ($1 million per couple).
Regarding trusts, it is proposed that grantor retained annuity trusts (GRATs) would have a minimum term of 10 years. The Greenbook would also eliminate the ability to make a zeroed-out contribution to GRATs. In addition, any sale to a grantor trust would be treated as taxable, and any payment of the tax on trust income would be treated as a gift.
The wealth transfer tax is back. The Greenbook would require the donor of appreciated assets to recognize capital gains income. Unlike the 2022 proposal, the 2023 proposal increases the exclusion from $1 million to $5 million. Like before, it applies to both transfers during life and death.
The Greenbook calls for a partial elimination of stepped-up basis. Any assets inherited by a spouse would get a carryover basis, not a stepped-up basis. Because of appreciating assets (land) in farming, this could create a huge tax issue.
All farm income, including self-rental, would be potentially subject to the 3.8% net investment income tax or the 3.8% self-employed Medicare tax.
The Greenbook proposes an election to defer the recognition of gain on certain family-owned and operated business until the assets are sold or the business ceases to be a family-run business. If the election to defer isn't made, the tax could be paid back over a 15-year period on a fixed payment schedule.
As you can see, many of the proposals are similar to last year's Greenbook. One thing that wasn't in this year's Greenbook is a change to the estate and gift exemption.
As a whole, the changes to trusts, partial elimination of step-up basis and the wealth transfer tax could be devastating to farmers. I will write more if anything gets traction. For now, hope that there is gridlock and nothing passes.
-- 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 https://www.dtnpf.com/…
-- You may email Rod at firstname.lastname@example.org
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