November 16, 2023
It is always important for those involved in agriculture to have an understanding of the current tax laws in light of the fact that the laws change often and those changes can have a big impact on the bottom line for the operation. Most farmers are beginning the process of planning for next year and meeting with their farm accountants to finalize their tax plans for 2023 returns and the 2024 tax year. While tax planning prior to the end of the year is always important, my suggestion is to look in the longer term this year and next.
Planning now is particularly important because many provisions contained in the Tax Cuts and Jobs Act of 2017 will “sunset” on Dec. 31, 2025. This means that if Congress and the president cannot agree on tax legislation to extend the current rates, it is likely that the increases will impact farm families. Set to sunset are the current income tax rates, capital gains rates and the provisions relating to the federal estate/gift tax exclusion. The TCJA contains many significant changes and tax cuts. Since that time, there has really been no major tax legislation passed.
Besides focusing on lower income tax rates that may be expiring, farmers might also want to look at their estate and succession planning to see if there are changes that need to be made in the next few years before the current exclusion amounts sunset. If the Congress and the president are still divided after next year’s election, a sunset is likely.
Death tax always an issue
The value of the assets owned by a person at their date of death determines the tax that could be due to the federal government, if any. This year, the first $12.92 million of assets are exempt from estate tax per person. Thus, a farm family can accumulate approximately $25.84 million this year and be exempt from federal estate tax if tax planning is handled properly. Remember, no estate tax is due on property distributed to the surviving spouse. Federal estate tax would come into play at the death of the second spouse, if there are assets above the exemption amounts.
The TCJA doubled the exclusion amounts from $5 million to $10 million in 2018, and those amounts have been adjusted for inflation each year. Next year’s exclusion amount will be $13.61 million per person. Many experts call the temporary increase in the exclusion amount a “bonus” exemption amount. In 2026, those exclusions will be cut in half. Further, certain assets get a “step-up” in basis upon death —including farmland — meaning that the value at the date of death is the basis that the person inheriting will receive. Thus, if that person sold the farm, they would have some relief from a hefty capital gain bill with IRS.
Farmers need to plan
The planning point is that every farm family should update their net worth statement and discuss their assets with their accountant. Even if the value of your assets is not over the current or future exclusion amount, it is reasonable to plan to transition your assets in the most tax-efficient manner possible. It is reasonable for a farm family to start discussing the impact of the bonus exclusion amount being cut in half and having a plan to move forward, depending on the outcome of elections. The sooner you start planning, the better.
When there is a death in the farm family, look to your lawyer, farm CPA or accountant to guide you in all tax matters. It is important to ensure that all filing deadlines are met and that you have a good understanding of tax implications from state and federal levels. Your attorney or accountant will assist you in filing the appropriate returns.
What is portability?
Current law since 2011 has included the concept of portability — the ability to use your spouse’s unused federal estate tax exemption. So, if your spouse dies and the exclusion amount is $13.61 million and their estate is valued at $5 million, then the surviving spouse can make an election to “port” the unused exemption (in this case, $6.61 million). So far, the IRS has indicated that the unused portion elected to be used by the spouse at the time of their death would not be subject to the limitations if there is a sunset. Thus, the IRS is not indicating that they would “claw back” the ported exemption. The key is that the election must be made within nine months of the spouse’s date of death. However, the IRS has allowed taxpayers a reprieve from that rule now, and if your spouse has died in the last five years, you can file a federal estate tax return (Form 706) to elect portability.
Plan for now, adjust later
One of the most important issues to address in the midst of tax uncertainty is to plan for now and leave room for adjustment. This is one of the most difficult areas to address with clients and makes the planning process more difficult. My advice is to plan for now and keep that plan flexible enough that the plan can be adjusted later, if changes occur. Whether you are creating an estate plan, a business succession plan, a tax plan or an operating plan, it is always better to create a plan that works for your family given the current state of your operation and current laws and regulations. Reviewing your plan and staying up to date on changing laws, regulations and new ideas is always important. As always, consult with your farm tax preparer, financial adviser or attorney to understand the impact of tax reform on your operation. This time of the year, most of these advisers are attending continuing education to stay informed of any tax developments.
Herbold-Swalwell is with Parker & Geadelmann PLLC. Email her at [email protected].
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