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Farmers worried by possible new capital gains, estate tax liability

Very few farm families pay estate taxes but almost all large-scale farmers are worried that changes in the tax code will increase their exposure to capital gains or estate taxes, said a Purdue University survey released on Tuesday. The poll was conducted before the White House said nearly all inherited farms would be exempt from the proposed tax changes.

Biden proposed the tax law changes to help to pay for his infrastructure and jobs packages, but Congress will decide in the coming months whether to do so.

Some 95% of producers taking part in the Purdue survey said they were “somewhat” or “very” concerned about possible elimination of “stepped-up basis” in calculating the value of inherited property. Under stepped-up basis, property is assessed at its current value, rather than the price it was acquired. By ending the stepped-up basis, capital gains taxes would generally go up.

A similar 95% said they were concerned that congressional changes in the estate tax “will make it more difficult to pass your farm on to the next generation of farmers in your family.” In addition, 88% said they were ‘”somewhat” or “very” concerned about a possible reduction in the estate tax exemption.

“Perhaps the biggest issue facing farm families is their ability to pass their farm business on to the next generation,” wrote Purdue economists Jim Mintert and Michael Langemeier, who oversee the monthly Ag Economy Barometer. The 95% response rate to questions about inheritances and estate taxes suggest “this issue is on the minds of nearly all ag producers,” they said.

Farmers recall past episodes of debilitating estate taxes, said Mintert. Capital gains also are fraught. “Agriculture is very capital intensive,” said Mintert. “Tax rates on capital gains can have a disproportionate impact on firms in a capital intensive industry, particularly one where the primary asset, farmland, tends to increase in value over time.”

For its Ag Economy Barometer, Purdue conducts a telephone survey of 400 farmers and ranchers who produce at least $500,000 in crops and livestock annually. The largest 7.4% of U.S. farms top $500,000 in sales, says the USDA. Their average size ranges from 1,942 to 2,915 acres. The average U.S. farm is 444 acres because eight of every 10 farms are small in size.

Purdue conducted its poll from April 19-23. Biden presented his tax proposals last Wednesday.

Biden aimed the tax increases at the investor class. “We’re going to reward work, not just wealth,” he said in a speech to Congress. The White House said it would end the stepped-up basis on gains that exceed $1 million. “The reform will be designed with protections so that family-owned businesses and farms will not have to pay tax when given to heirs who continue to run the business.” The USDA said 98% of farm estates “will not owe any tax at transfer, assuming the farm stays in the family.” For the remaining 2%, tax liability would be linked to non-farm assets.

The largest U.S. farm group was skeptical that Biden’s promised shield could be fashioned into the tax code in a useful form. And it said one-third of U.S. farms have assets that would trigger the “new capital gains tax on death.” The American Farm Bureau Federation wants the stepped-up basis to remain as it is. The tax break reduces the tax burden if property is sold after it is inherited and reduces the chance of estate tax liability.

The Trump tax cuts increased to $11 million the individual exemption from estates. The provision is due to expire in 2026 and revert to $5 million per person.

According to a recent USDA study, only a handful of farm families are obliged to file a federal estate-tax return and most of them do not pay the government anything.

The Ag Economy Barometer is available here.

Produced with FERN, non-profit reporting on food, agriculture, and environmental health.
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