Wary Eyes Are on the Tax Man
July 26, 2021 We have spent a lot of money in the past year or so. If there was ever an argument for doing so, a global pandemic and its economic fallout is about as good as any. But it also gave lawmakers a proverbial blank check to do what they like most: bring home the bacon and spend, spend, spend.
I won’t go down that political rabbit hole, but the fact remains you and I – the taxpayer – are on the hook for the spending whether we agree with it or not. The U.S. national debt is nearing $30 trillion and along with a proposed Biden budget of about $4 trillion, that debt (usdebtclock.org) is going to keep on climbing.
But at some point, we will have to bring spending under control and slow the rate of debt. That means taxes are going to go up. One particular tax provision has U.S. agricultural interests worried. President Biden’s tax proposal would eliminate the stepped-up basis on inherited assets above $1 million for individuals and $2 million for married couples.
While the Biden administration has said protections would be put in place to protect family farms, farm groups still are nervous. In May, 40 farm organizations signed a letter to congressional leaders to maintain tax provisions that keep family farms in business. The National Cotton Council and Cotton Warehouse Association of America were among them.
The letter noted that capital gains protections are vitally important, especially given the aging population of U.S. growers. It is expected that about 370 million acres of farmland will change hands in the next two decades.
The letter notes: “Because assets in agriculture are typically held by one owner for several decades, resetting the basis on the value of the land, buildings, and livestock on the date of the owner’s death under a step-up in basis is important for surviving family members and business partners to ensure the future financial stability of the operation.”
To keep it very simplified, say Mom and Dad bought a piece of land for $20,000 back in the day and the land is now worth $100,000. The way it works now is the tax liability steps up with the current fair market value. So, when the land is passed to the heirs, if they were to sell it for $120,000 one day, they would owe tax on the $20,000 gain in value since they inherited the property. But if the step up was eliminated, the heirs would owe on the gains since the original purchase – $100,000.
Biden’s plan also would increase the capital gains tax rate from 20% to 39.6% for people with more than $1 million in income. An analysis shows that increased capital gains and elimination of stepped-up basis could generate $113 billion in new taxes over the next 10 years. However, in its letter to congressional leaders, farm groups request that the current estate tax exclusion of $11.7 million must be maintained along with stepped-up basis. For the many farm families that are asset rich, but cash poor, that is a must.
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