August 24, 2023
by Evin Bachelor
Congressman Jimmy Panetta of California has reintroduced a bill in the U.S. House of Representatives with the aim of increasing the 2032A special-use valuation cap for qualified family farms.
The intent of the increase is to reduce the number of family farms having to sell farm-related assets to satisfy an estate tax debt.
If passed, the higher exemption will have a significant positive impact for farm families in taxable estate brackets.
2032A is a helpful tax valuation for farm families that reduces the value of some farm real property. Rather than having to value farm real property at market or development value, 2032A allows qualified family farms and ranches to elect a lower value based on a few specified formulas.
The reduction in value is capped at $1.31 million for 2023. The cap means that a calculation under the specified formulas that would otherwise provide a discounted valuation of $5 million will nonetheless be capped at a reduction of $1.31 million.
The limit is calculated from a baseline of $750,000 in the Internal Revenue Code, plus an annual inflation adjustment for the consumer price index. Congress last changed the baseline in 1981, from $600,000.
The proposed legislation would increase the baseline exemption from $750,000 to $13 million.
Panetta previously proposed this same legislation in the last Congress, but it died in the U.S. House Ways and Means Committee. A companion bill in the U.S. Senate met the same fate. The destiny of the new bill remains to be determined.
What it means for you
A couple of important notes about 2032A and what it means for you:
First, not every farm family will qualify for 2032A. The exemption is relatively narrow. Among other conditions, the person who passed away must have been a current or retired farmer, the land must be used by a family member for farming after the person passes away, and it must pass to a qualified or eligible heir. The focus of this article is the proposed exemption increase, not how to qualify, so be on the lookout for other resources on how to qualify.
Second, not every farm family is at risk of paying estate taxes, sometimes referred to as an inheritance tax or death tax. The federal estate tax exemption for 2023 is $12.92 million per person (or $25.84 million per couple). If you die and your estate does not meet or exceed the exemption level, then your estate owes no estate taxes. If you die and your estate value exceeds the exemption level, then your estate may incur a close-to-40% tax on the excess value.
At the end of 2025, the current exemption level will “sunset” unless Congress acts to extend the current exemptions. This temporary tax measure doubled the estate tax exemption from $5.49 million to $11.18 million. If Congress does not act, the exemption will return to its previous level, plus an adjustment for inflation based on the consumer price index.
Depending upon what happens between now and the end of 2025, your estate tax risk may change. A lower estate tax exemption coupled with the current 2032A exemption will result in major financial difficulty for farm families with low liquidity and high farmland value in excess of the estate tax exemption.
However, a lower estate tax exemption paired with a higher 2032A exemption may save many family farms from having to be sold to satisfy an estate tax debt.
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