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Estate Tax Hike on the Horizon PDF Print E-mail

Estate Tax Hike on the Horizon…Are you ready?

Article by Carolina Clark
from Accent West Magazine

The estate tax, also known as the death tax, is one of the leading causes of the breakup of multi-generation family ranches. A 10-year phase out of the estate tax to full repeal took effect in January 2010, but without further action by Congress and the Administration, the tax is scheduled to be reinstated January 1, 2011 at the 2001 levels. The 2001 levels range from 37 percent to 55 percent with a $1 million per spouse exemption. This tax structure is detrimental to family ranches.

A variety of legislation has been filed that would provide relief in the tax code from the estate tax for family ranches, property owners and small business owners, such as making the repeal permanent, raising exemption levels, lowering the tax rate, and providing an exemption for agriculture production assets.

 As the American people voted on November 2, 2010, the National Cattlemen’s Beef Association (NCBA) issued a reminder to the current members of the U.S. House of Representatives and U.S. Senate that there is still work to be completed in the 111th Congress, including fixing the estate tax.

“We’re all playing the parlor game in Washington trying to guess what Congress will decide to consider during the lame-duck session,” said NCBA Vice President of Government Affairs Colin Woodall. “But NCBA’s top priority is to stop the death tax from returning to a 55 percent rate on all property over $1 million and provide family farmers and ranchers with some needed relief and certainty. If nothing is done, the death tax will hit a lot of cattle operations, a lot of family farms, and we can’t let that happen.”

Dave Scott, rancher and president of the Texas and Southwestern Cattle Raisers Association (TSCRA) says, “A million dollars sounds like a lot of money, but when you are talking about ranchers, very few of us are millionaires. While most ranching assets have increased in value, margins in the ranching business are thin and cash isn’t readily handy.

“If Uncle Sam comes knocking on my door and demands millions in taxes, I have no choice but to sell off my family’s assets to come up with the cash. Piece by piece, my family’s culture and heritage is sold off to pay the tax bill,” he continued.

 It is important to note that legislation eliminating the estate tax completely has been introduced in both the House and Senate in many forms since 2001. However, Sessions of Congress last two years, and at the end of each session all proposed bills and resolutions that haven’t passed are cleared from the books. Members often reintroduce bills that did not come up for debate under a new number in the next session.

While the NCBA continues to support a full repeal of the estate tax, Woodall considers a full repeal unachievable at this point given the current climate in Congress. Therefore, the NCBA supports an amendment (HR 3905) introduced in the Senate by Blanche Lincoln (D-Ark.) and Jon Kyl (R-Ariz.) and in the House by Shelley Berkley (D-Nev.) and Kevin Brady (R-Texas) to increase the exemption level to $5 million and reduce the rate to 35 percent. The proposal also ensures that any relief related to the exemption is tied to inflation and that a stepped-up basis is included. Woodall said NCBA also supports proposals for an estate tax exemption for agriculture.

“Whether they won reelection or they’re headed out the door, we’ve got to get all members of Congress focused on fixing the death tax,” Woodall said. “Our success in stopping it depends on a strong grassroots effort from NCBA members, all cattle producers, farmers and landowners and small business owners across the country. Our industry has had a rough two years with this Administration and this Congress, and while we’re looking forward to working with the newly-elected Congress on critical issues dealing with tax, international trade and environmental policy, we’ve first got to stop the death tax from hitting thousands of cattle producers on January 1, 2011.

” In addition to the dramatic estate tax hike, potential increases on capital gains, income and dividend taxes are on the horizon. If Congress continues to sit idle on these taxes, the 33 percent income tax rate could return to 36 percent. The 35 percent rate would return to 39.6 percent. These increased tax rates would affect small business, including ranching families, earning at least $200,000 annually. The current 15 percent capital gains tax will increase to 20 percent. The dividends tax rate will increase from 15 percent back to income tax rates, which means up to 39.6 percent.

“Win or lose, members of Congress must come together during the Lame Duck session to reform taxes that are scheduled to expire at the end of this year,” Scott continued. “If they fail to do so, Texas ranchers will pay the price.”

 In a congressional report following the recent Republican victory in the House and gains in the Senate, President Obama said that it was imperative for Congress to resolve the tax issue in the post-election lame-duck session and that his primary goal is making sure the tax cuts for middle-income families do not expire, as scheduled, on Dec. 31.

Unlike his previous statements on the issue, he did not express opposition to also extending the upper-income tax rates, as Republicans want — a shift that appears to reflect the balance of power set to take hold in January and growing GOP leverage. While the White House seems to be open to a full extension of the soon-to-expire 2001 and 2003 tax cuts, what will actually happen is yet to be seen.

 Lance Jones, a Canyon-based CPA / Shareholder of Brown, Graham & Company, PC, offers some advice on how to prepare. “If nothing changes in Congress and we remain at a $1 million exemption for 2011, there are still some options to be had. One is to deal with the issue through purchasing a life insurance policy and establishing an irrevocable trust to pay for the estate taxes. However, this can be expensive.

 “Another option is to create minority ownership through a limited partnership. I’d definitely encourage folks to take advantage of gifting assets up to the allowable $13,000 (or $26,000 per couple) each year. All of these vehicles will help defray the taxes owed by those who inherit the estate,” says Jones. His practice focuses on income tax preparation and consultation, as well as estate planning.

D. Lynn Tate, a Shareholder of Underwood, Wilson, Berry, Stein and Johnson, P.C., agrees with Jones. “This is a very timely issue. Just about anyone involved in agriculture is about to have problems with estate taxes,” Tate says.

Tate encourages individuals to take the time now, before the end of the year, to become informed about his or her estate and plan accordingly. “Don’t forget that equipment holdings are also considered taxable assets. Start doing the math. With a couple tractors and a combine, it isn’t hard to rack up more than $1 million in heavy machinery. Also, be very careful that you don’t give everything outright to your spouse, as there is a $1 million per person exemption. It’s a very common mistake,” Tate notes.

The Amarillo-based attorney is well-versed when it comes to Agriculture in the Texas Panhandle. Legally, he represents both agricultural-based businesses and families, including significant clients involved in the dairy expansion in this area. Personally, Tate is a landowner with major farming and ranching interests.

He notes, “Commodity prices – cotton, corn and all the grains– are high and will most likely keep going up. Land values are escalating as well. For instance, one very well irrigated piece of land in this area was going for $1500 an acre six months ago. Today it’s listed for $1850 an acre. I feel very confident they will get that amount for it too.”

For perspective, consider that the average appraised market value of a farm, ranch or forest land in Texas was $1,196 per acre in 2007 – a 140 percent increase since 1997. Such escalation of land values forces many farmers and ranchers to make a hard choice between cashing out or hanging on, and discourages new farmers and ranchers from even trying.

According to the National Cattlemen’s Beef Association (NCBA), 97 percent of American farms and ranches are owned and operated by families. Farm and ranch estates are five to 20 times more likely to incur estate taxes than other estates. According to the USDA Economic Research Service, one in 10 farm estates (farms with sales of $250,000 or more annually) were likely to owe estate taxes in 2009. The estate tax is considered to be one of the leading causes of the breakup of multigenerational farms and ranches.

Such fragmentation into smaller operations threatens the economic sustainability of farming and ranching. In 2007, fewer than 50% of all agricultural holdings with less than 500 acres in the state reported generating a profit. When properties splinter into smaller parcels, agriculture, wildlife and rural economies suffer. As our nation counts down the final days of the 111th Congress, many things are uncertain, except death and taxes. Get ready.

Federal Estate Tax Update

The following is a summary of the current estate, gift and generation skipping tax rates, and a brief update on the most prominent bills regarding the estate tax and conservation easement tax matters.*

Year Exclusion Amount Max/Top Tax Rate
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 * Repealed * 0% *
2011 $1 million 55%

  Federal Estate Taxes – The Tax Reconciliation Act of 2001 provides that for the year 2010, the federal estate tax is eliminated for estates of decedents dying in 2010, and the tax basis of any assets transferred under those estates is changed from a “stepped –up” basis (meaning fair market value at the date of death) to a carryover basis. The Tax Reconciliation Act of 2001 provides that for the year 2011 and beyond, the federal estate tax would revert to the pre-2001 levels of a 55% top rate and an exclusion amount of $1 million (not indexed for inflation).

Federal Gift Taxes – Even though the federal estate tax was officially repealed for 2010, currently the federal tax code gives you a lifetime gift tax exemption of $1 million that can be used to offset your taxable gifts, and exempts up to $13,000 per year in gifts made by any individual to any number of other individuals - this is referred to as the annual exclusion from gift taxes. Beginning in 2011, the gift tax rate will equal the highest individual income tax rate.

Generation Skipping Taxes – For 2010, the federal generation skipping transfer tax, or GST tax, was officially repealed. For persons who died during 2009, the tax applied to transfers of more than $3.5 million that “skipped” one or more generations. “Skip” refers to either a transfer that was made to a relative who was two or more generations below your generation (for example, a grandparent to a grandchild), or to a non-relative who was more than 37 ½ years younger than you. Current law provides that the GST tax will come back in 2011 with an exemption of only $1 million that will be indexed for inflation in 2012 and beyond.

Bills Pending in Congress

Family Farm Estate Tax Deferral Act of 2010 (Senate Bill 3664) – As a way to protect family farms and ranches before the estate tax returns to its pre-2001 rate, California Senator Feinstein and Idaho Senator Mike Crapo introduced the Family Farm Estate Tax Deferral Act of 2010 in July of 2010. The bill would defer the payment of estate taxes on farm and ranch assets until the farms or ranches are no longer operated by the family, or until they are sold or used for other purposes. Under the Family Farm Estate Tax Deferral Act, estate taxes on farm or ranch assets would be deferred, provided the following conditions are met:

• The farm or ranch must be passed down to a family member;
• The decedent must have been materially engaged in the farm's management and operation for a total of five of the eight years preceding his or her death;
• At least half of the decedent’s estate must be comprised of agricultural real and personal property;
• The family member inheriting the estate must continue to use the land for farming or ranching purposes;
• The average farm-related adjusted gross income of the decedent in the three years prior to death does not exceed $750,000 annually;
• At the time of his or her death, the decedent associated with the estate was a U.S. citizen or legal resident of the United States.

Under the bill, once the land is sold or no longer used for farm or ranch purposes, the estate tax would be “recaptured” using the value at the date the land is sold or its use changed and without a stepped up basis.

The Feinstein/Crapo bill also includes an expanded exclusion from estate tax for easement donors, increasing the IRC 2031(c) exclusion to 50% of the value of the protected land, and increasing the cap on that exclusion from $500,000 to $5 million.

Family Farm Estate Tax Relief Act of 2010 (HR 5475) – Introduced by California Rep. Mike Thompson in May, 2010, this bill would amend the Internal Revenue Code to: (1) exclude from the value of a decedent's gross estate farmland used by an heir for farming purposes; (2) impose a recapture tax on an heir who disposes of such farmland after the decedent's death or who ceases to use such farmland for farming purposes; and (3) increase the limitation on the estate tax exclusion for land subject to a qualified conservation easement to $5 million and the percentage of the value of such land that is excludable.

Salazar Bill (HR 173) – Introduced in January, 2009 by California Rep. John T. Salazar, this bill would amend the Internal Revenue Code to exclude from the gross estate of a decedent the value of farm or ranchland used by an heir of the decedent for farming purposes, with a condition that with respect to each of 3 or more of the 5 consecutive taxable years ending with the decedent's last taxable year, the decedent's gross income from farming or ranching exceeds 50 percent of the decedent's gross income. This bill would also impose a recapture tax on an heir who disposes of such farmland after the decedent's death or who ceases to use it for farming purposes.

American Family Farm and Ranchland Protection Act (H.R.3050/ S.3640) –Introduced in the House by Oregon rep. Earl Blumenauer and in the Senate by Colorado Senator Mark Udall, this bill would amend the Internal Revenue Code to increase to $5 million the limitation on the estate tax exclusion for land subject to a qualified   conservation easement and to increase the percentage of the value of such land that is excludable.
* Summary courtesy of the Texas Agricultural Land Trust (TALT) and Arthur Uhl, a partner with the San Antonio based Uhl, Fitzsimons and Jewett PLLC.

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2010 tax planning: Confusing, yet similar, system in place PDF Print E-mail

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December 03, 2010

2010 tax planning: Confusing, yet similar, system in place

Ag producers may benefit from some tax considerations

By: This e-mail address is being protected from spambots. You need JavaScript enabled to view it , 979-845-2259   This e-mail address is being protected from spambots. You need JavaScript enabled to view it , 210-467-6575  
Contact(s): Jose Pena, 830-278-9152, 512-575-8765, This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Dr. Wayne Hayenga , 979-845-5446, This e-mail address is being protected from spambots. You need JavaScript enabled to view it  
COLLEGE STATION - Year-end tax planning for agricultural producers and general taxpayers must be done by "what is known" regarding current federal tax code, even though there’s uncertainty about extending certain tax cuts, according to Texas AgriLife Extension Service economists.
Jose Pena, AgriLife Extension economist-management at the Texas AgriLife Research and Extension Center in Uvalde, said it’s currently unknown if Congress will extend tax cuts that are part of the 2001 Economic Growth and Tax Relief Reconciliation Act.

If the tax cuts imposed under the Bush administration are not extended, all tax rates will rise for all individual taxpayers, including those subject to the lowest tax rates, he said.

"Year-end tax planning appears confusing as the political climate in Congress changes and Congress remains in a stalemate over extending the tax cuts, which are scheduled to expire Dec. 31," Pena said.

A hot-button item among agriculture producers is the estate tax, which was repealed in 2010. Under current law, there is no federal estate tax, but heirs who sell appreciated assets may face capital gains taxes.

"In 2011, the estate tax is set to return with a $1 million exemption and a top rate of 55 percent on the largest estates," Pena said. "But it appears some Congressmen are pondering a $3.5 million exemption with a 45 percent top rate, which over the years would evolve into a $5 million exemption and a maximum tax rate of 35 percent. It appears, however, that the estate tax is not going to disappear."

Meanwhile, he said, agricultural producers and small business owners may be able to take advantage of some extended tax cuts as part of the Small Business Jobs Act of 2010 signed into law in September.

"This extended some of the business tax cuts which had expired in 2009," Pena noted.

He said some of extensions and allowances from which agricultural producers may derive a tax benefit include:

- Extending and increasing the Section 179 expensing option for depreciable property used in business (computers, office furniture, equipment, vehicles or other tangible business property) to a maximum of $500,000 for tax years 2010 and 2011 only.

- Extending the 50 percent bonus depreciation for 2010, which was set to expire at the end of 2009 for new property as long as the property is placed into service before Jan. 1, 2011.

- Allowing the deduction of cell phone business use without documentation.

- Temporarily increasing the amount of start-up expenditures that small businesses can deduct from their taxes in 2010 from $5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures).

- Allowing a deduction for the cost of small-business health insurance premiums in calculating self-employment taxes.

The increased Section 179 expensing option and the 50 percent depreciation provision can give agricultural producers a great ability to manage income and Social Security taxes for 2010, said Dr. Wayne Hayenga, Texas A&M University professor emeritus and AgriLife Extension agricultural economist.

"Some producers who bought equipment in 2010 may be able to almost eliminate taxable income for the year," Hayenga said. “And cash-basis producers can use expensing to avoid tax on income carried forward from prior years. They can also use it to avoid income and Social Security taxes on much of their 2010 income."

He added that current discussions in Congress regarding cutting the tax rate for 2011 also likely will have an impact on agricultural producers.

"It probably wouldn’t make sense for producers to lower their taxable income, missing out on otherwise allowable personal exemptions and deductions," Hayenga said. “Also, some producers may want to report sufficient income to qualify for an earned-income credit."

Pena said tax breaks that expired at the end of 2009 included deduction for classroom expenses for educators; tuition and fees deduction for college; additional standard deduction for property taxes; additional standard deduction or itemized deduction for sales taxes paid on a new vehicle; itemized deductions for state and local sales taxes in lieu of state income taxes; tax-free exclusion of the first $2,400 in unemployment benefits; and tax-free exclusion of IRA funds donated directly to charity.

"In addition, required IRA payments from IRA plans resume this year," Pena said. "Congress also did not extend last year’s waiver of required IRA distributions for those age 70 ½ or older."

He added that the $1,000 child tax credit available through 2010 as part of the Emergency Economic Stabilization Act of 2008 and the 2009 stimulus package will be reduced to $500 in 2011.

"And cost-of-energy efficiency improvements may be entitled to a tax credit of 30 percent of the purchase price up to a maximum credit of $1,500," he said. "But that credit will be offset by the alternative minimum tax in 2010 unless Congress changes the rules."

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