Federal tax changes for farmers
While the fiscal cliff showdown left farmers holding their breath, resulting legislation should allow them to breathe easier. Included in the American Taxpayer Relief Act of 2012 are revised brackets, incentives to purchase farm assets, changes for estate transfers and much more.
"For farmers, it was good," says Tom Bayer, partner in charge of agribusiness services with Midwest-based Sikich LLP. "The rate structure, other than those high-incomers, remains basically the same."
The law makes existing tax brackets permanent and adds a 39.6% bracket for individuals making more than $400,000 and married couples filing jointly making more than $450,000, say David Marrison and Chris Bruynis of Ohio State University Extension.
Existing capital gains rates have been maintained, and a 20% capital gains rate for those who fall into the new 39.6% bracket has been added. Under the law, farmers with higher income also must pay an additional 3.8% Medicare surtax, Bayer says.
The federal estate tax experienced only minor adjustments. Congress maintained a $5 million exemption for single taxpayers, also continuing a provision for inflation adjustment. For 2013, the inflation-adjusted amount is expected to be $5.25 million, says Andrew Zenk, agribusiness consultant at AgCountry Farm Credit Services in Fargo, N.D. A $10 million exemption remains in place for married couples, with an expected adjustment for inflation to $10.5 million. At death, net worth above those exemption levels will be taxed at a rate of 40%, Zenk says, up from 35%.
Without congressional action, the federal estate tax would have dropped to $1 million per taxpayer, hindering farmers’ ability to transfer property to the next generation.
Another estate-tax component that remains in place for couples is the portability clause, says Bruce Thompson, also a partner at Sikich. That clause permits "the transfer of the unused portion of the lifetime exclusion from the estate of the first spouse who dies to the surviving spouse, assuring the availability of the total lifetime exclusions in effect at each person’s death," he says.
Section 179. Changes to the tax code extend to machinery purchases and other qualifying farm assets. The Section 179 tax incentive has been extended through the 2013 tax year, enabling farmers to expense up to $500,000 of qualified new or used capital investments. A phaseout remains in place for purchases totaling more than $2 million, and the incentive will not be adjusted for inflation.
The law also extends the special 50% bonus depreciation through the end of 2013. Businesses can deduct half the cost of qualifying property in the year it’s placed in service.
Middle-income farmers stand to benefit from changes to the alternative minimum tax, says Paul Neiffer, CPA and partner at CliftonLarsonAllen. Congress decided to index that tax to inflation permanently.
No matter how tax changes might affect farmers differently this year, the need for planning remains constant.
"Meet with your tax professional so they understand your current business situation and can help you apply the tax law to maximize your benefit," Bayer says. "Do that during the tax year rather than after."
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