President Biden and Congress have been actively pushing to tax the rich, but who are the rich? I think about this often and wonder how representatives in Washington, D.C., define the term. In my opinion, there are different classifications of rich.
Everyone knows Bill Gates and Jeff Bezos are rich. But, are farmers rich? We all have heard the expression land rich, cash poor. Yes, on paper, many of my clients are rich. However, it's all tied to business assets that add value to the economy. I wonder if people would be envious if they know my clients might have $10 million in assets, but after paying debt and putting money back into the farm, their personal cash-flow is under $100,000. When they exit farming and sell their assets, they would net out very little money after debt and taxes. If they wanted their kids to take over, they can't sell land/assets to the next generation for fair market value, or the kids could not afford to farm because it's such a capital-intensive business. So, yes, on paper they might be rich, but reality may be very different.
Let's look at the latest tax proposal, the American Families Plan (AFP). The list of items the AFP wants to address is too long to go over, but the majority of funds goes to individuals, not infrastructure. The real question is how Congress will pay for it. Here are some highlights that will impact farming.
-- increase highest ordinary tax bracket to 39.6%
-- capital gains rates at 39.6% if gain/income more than $1 million
-- eliminate 199A for incomes more than $400,000
-- incorporate STEP (Sensible Taxation and Equity Promotion) Act into law (This includes a repeal of stepped-up basis for gains more than $1 million.)
-- require deferred gains more than $500,000 on all 1031 transactions to be taxed
-- NIIT (Net Investment Income Tax) required on almost all sources of income more than $400,000
-- increased audits on those making more than $400,000.
The wording would allow for farms to defer tax if actively farmed by heirs (not defined at this point).
Once it's no longer actively farmed, tax would be due with interest. There are also questions under AFP if NIIT would apply to self-rental income.
Two questions I get asked: 1) Is it retroactive to Jan. 1, 2021? and 2) What should I do? The AFP doesn't mention making it retroactive to the start of 2021. But, we can't make assumptions and need to see the final version.
Now, the trickier question: What should you do? First off, stay informed and talk to your tax professional, especially if you are over the age of 60 and/or nearing a transition event. Many of my clients are in the process of gifting assets and setting up spousal access and irrevocable trusts in order to use current gift tax exemptions.
Without stepped-up basis, there is no benefit in holding assets until death. With high land values, some farmers are opting to sell in hopes of avoiding a substantial increase in capital gains tax.
Keep in mind there are many farmers currently working on a plan. If you think you want to do something this year, you should reach out to your tax professional, land/farm valuation specialist and attorney now.
-- 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 firstname.lastname@example.org.
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