Yesterday’s proposed tax package by the Democrats in the U.S. House of Representatives was applauded by the agriculture industry as it eliminated the possibility of changes to the step-up in basis.
“We were pleased to see the capital gains tax at death was omitted from this proposed tax language. It means that larger farmers and ranchers seeking to pass their property onto their children will not have any additional challenges related to step-up in basis,” says Brian Kuehl, Director of Government and Public Affairs for KCoe Isom.
Additional Notables in this Proposed Tax Package for Farmers
There are, however, some notable tax provisions that were included in the 900-plus pages of this package that should be regarded carefully, according to KCoe’s tax advisors. After combing through the proposed package, KCoe advisors have highlighted notable changes and actions needed by farmers today in anticipation of the expected passage of these items:
Accelerated Estate Tax Exemption Expiration: Moved to End of this Year
The estate tax exemptions that were doubled in 2017 were set to expire after 2025. The proposed bill would accelerate the expiration to December 31, 2021.
- Action recommended: Farmers and ranchers should consider taking advantage of the high exemption levels that will likely only exist for the next three months. We highly recommend working with advisors immediately to get as many assets out of your estate as possible before year-end to minimize the taxes that will eventually be paid by estates.
Grantor Trusts and Estate Tax Valuation Rule: Could Change
The proposal states that certain grantor trusts are to be treated as separate from their owners, and valuation discounts for contributions of business interests to trusts would be eliminated. Should this become law it will create income and estate tax complexities around a frequently-used estate planning tool.
- Action recommended: Speak with your advisor regarding the potential impact this may have on your tax plans.
Proposed Increase to the Limit of “Special Use Valuation”
In a supportive bid to fulfill the Congressional promise not to increase any taxes on farmers, the package sets out to increase the limit of the so-called “special use valuation,” which reduces the value of qualified farm real estate when it is inherited by qualified relatives who are actively engaged in the operation.
- Action recommended: This proposed increase could positively impact farmer and rancher tax strategies, and adjustments should be made when the language is passed into law.
Other positive tax impacts which were notable for farmers and ranchers were the proposal of a capital gains increase to 25% for individuals in the top income tax bracket (effective for transfers occurring after September 13, 2021), as well as the noticeable absence of any change to the like-kind exchange.
A Look Ahead
As hearings continue, these proposed tax changes may change. KCoe will continue to evaluate the potential impacts on businesses and individuals.
Please reach out to a KCoe tax advisor for questions on tax strategy or help with year-end planning.
