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Estate tax burdens many families

Although only about 4 percent of all farmers owe federal estate taxes, repeal of the tax would affect a much broader group of farmers, according to USDA Economic Research Service senior economists Ron Durst and James Monke.

A significant benefit would be relieving farmers of the administrative burden of filing the tax returns, since many of those required to file now do not actually have to pay any taxes, they said at the Agricultural Outlook Conference in Washington.

The number of farm estates that must file tax returns, but owe no tax as a result of special provisions in the law, is nearly double the number of farm estates that actually owe taxes.

Elimination of the tax would also relieve those farmers with assets near the filing threshold from having to alter their business plans or engage in other techniques to try and avoid estate taxes.

Several farm organizations have been actively lobbying for several years for repeal of federal estate tax provisions, and although there is considerable congressional support, other alternative measures also are being discussed, including a significant increase in the unified credit or increasing the value of special provisions for farmers.

Generate substantial revenue

“Due to the concerns about the cost to the government of eliminating the estate tax, repeal is likely to be phased in over several years,” they say, and could also involve some limitations on the step-up in basis rules that currently exempt unrealized gains on inherited property.

Since a large share of the estate tax comes from estates valued at more than $5 million, an immediate significant increase in the exempt amount could sharply reduce the number of estates required to file a return and pay taxes, but would still generate a substantial tax revenue for the government.

“Due to the concerns about the cost to the government of eliminating the estate tax, repeal is likely to be phased in over several years.”

“This alternative may provide a greater reduction in taxes to a larger number of farm estates over the next decade,” they say. “In any event, whether it is a phased-in repeal or a significant increase in the exempt amount, it seems likely that federal estate taxes will be eliminated as a factor affecting the transfer of the family farm to the next generation.”

Tax law changes enacted in 1997 reduced the number of farm estates subject to tax by increasing the amount exempted through the unified credit from $600,000 to $1 million by 2006, and by increasing the favored treatment of farm and other business assets over other assets for estate tax purposes.

Despite this favorable treatment, however, nearly twice as many farm estates are taxable than other estates — about 4 percent of all farm estates in 1998, compared to only 2 percent of all estates. The total amount of federal estate taxes owed by farmers that year was $735 million; the average tax due was $600,000 on an average net worth of about $2.8 million.

Estate and gift taxes have historically accounted for a relatively small share of total federal revenues — only a little more than 1 percent in 1998. Although the number of estates subject to tax has more than doubled over the last decade, only about 2 percent of all estates are currently taxable.

“Nevertheless, while the aggregate importance of these taxes is small relative to other federal government revenue sources, the potential impact of these taxes on an individual or group of individuals, such as farmers and other small business owners, can be substantial.”

The appreciation in land values, increases in farm size, and the rising investment in farm machinery have increases farm estate values and taxes. Over the years, congressional concern that the farm sector's increasing estate and gift tax liability might cause the break-up of some family farms and small businesses had led to the enactment of a number of targeted provisions to give tax relief to these groups.

Without the special provisions in the 1997 tax law changes, the federal estate tax “would impose a much greater burden on farmers,” the Durst and Monke say.

“The potential for savings is highlighted by the fact that the special use valuation and the family business deduction reduced both the number of taxable estates and total federal estate taxes for all farm estates by about half. The largest percentage reductions were for primary occupation farms with sales of between $100,000 and $250,000; federal estate taxes for this category of farms was cut nearly 75 percent.”

Reductions for “retirement” farms were substantially less, resulting in about a one-third reduction in taxes.

“This reflects the inability of a larger share of retirement farms to quality for the family business deduction due to the relatively large value of non-farm assets in the estate. This may reflect the disposition of farm assets in anticipation of, or during, retirement.”

Reductions as a percentage of tax also were smaller for very large farms, attributed chiefly to the cap on the reduction in value under the special use provision and the fixed deduction amount under the new deduction for family-owned business interests.

The installment payment provision further reduced the estate tax burden by providing below-market interest rates over an extended repayment period. “Over half of all taxable farm estates were eligible for installment payments,” they note. “These estates owed much higher taxes on average and accounted for over 87 percent of total federal estate taxes owed by farmers. The present value of federal estate tax payments for these farm estates was reduced by about one-third.”

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