How You Could Be Impacted By Tax Changes In The American Families Plan
SARA WYANT AND PHILIP BRASHER
WASHINGTON, D.C.
President Joe Biden recently unveiled the American Families Plan, which won both cheers and jeers across farm country. The biggest concern for farmers and ranchers comes from the proposed “pay fors” which includes tax changes.
Among other things, the $1.8 trillion package proposes to expand child nutrition assistance, offer free community college, universal pre-K, paid family and medical leave and an extend Affordable Care Act subsidies.
To pay for all of these, the president is also planning to impose higher taxes on corporations, high-income earners and capital gains taxes on inherited assets. However, he’s promised protections for farms and other family-owned businesses that continue in operation.
Under current law, capital gains taxes are only applied to inherited assets such as land, buildings and stocks when they are sold, and then they are taxed according to the “stepped-up basis” – the value at the time of the decedent’s death, not the value at which the decedent originally acquired the property.
A summary of the president’s plan says he wants to eliminate a “loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs,” exacerbating income inequality.
“The President’s plan will close this loophole, ending the practice of ‘stepping-up’ the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity,” the summary says.
“The reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business. Without these changes, billions in capital income would continue to escape taxation entirely.”
The White House didn’t provide any more detail of their proposal, but the Agriculture Department released a further explanation that said the proposal "defers any tax liability on family farms as long as the farm remains family-owned and operated." The USDA summary said that assets subject to the $1 million-per-person exemption would continue to receive the step-up in basis when sold.
Patricia Wolff, a senior director of congressional relations for the American Farm Bureau Federation, said there are three changes that could mean higher taxes for farmers and ranchers.
“One is an increase in the capital gains tax rate, that would apply to any sale of land or buildings. The second is a curb on the ability of farmers to sell one asset and buy another without paying capital gains taxes, that's called like kind exchanges, and the third is a new capital gains tax at death, and the repeal of stepped up basis.”
Wolff said the $1 million exemption was inadequate for agriculture and that the promised provisions protecting farms and ranches would likely be complicated and expensive for farmers to use.
“Just saying that you’re going to have some special program for farms and other family-owned businesses doesn’t mean that it’s a panacea,” she said.
She said 32 percent of U.S. farms would be worth more than $1 million, and those farms account for more than 90 percent of farmland.
Biden's plan is in line with a proposal announced by Sen. Chris Van Hollen, D-Md., in March that included a $1 million exemption.
The president is not proposing any changes to estate tax laws, but he is proposing to raise the top individual tax rate from 37 percent to 39.6 percent and require all households with incomes of more than $1 million to pay that rate on all their income, including capital gains.
That higher rate would make any tax on inherited farmland "astronomical," Wolff said.
But Jason Furman, an economic adviser to former President Barack Obama, said the proposal didn't go quite far enough.
"Taxing capital gains at death is a really important proposal that would do a lot to make capital taxation more efficient and effective," he said in one of a series of tweets. "I understand the $1m exemption may be needed politically, but substantively I also want more – which in this case would mean a lower exemption."
AFBF and other farm groups have been lobbying lawmakers to resist any of Biden’s proposals that would increase taxation of inherited assets.
Biden likely would have to hold all 50 Senate Democrats in line in order to pass his latest plan, especially with the tax increases he is proposing. Sen. Joe Manchin, D-W.Va., told a CNN reporter on Wednesday that the level of spending Biden is proposing makes him "very uncomfortable."
Senate Democratic Whip Richard Durbin, D-Ill., said the White House is open to changes, noting that Vice President Kamala Harris is calling Democrats to solicit ideas. Speaking on Agri-Pulse Open Mic, Durbin said the bill is at the “earliest stages” and “I don’t think the debate is finished.” He said that lawmakers ought to be looking at the impact on farm families who have been planning for generations.
Still, Paul Neiffer, a certified public accountant and principal at CliftonLarsonAllen said he’s advising clients to be ready to make changes and potentially to make major gifts now because some of the proposals are retroactive.
For years, we’ve told farmers to plan for estate distribution when you pass away and “our planning may change 180 degrees,” he said on Agri-Pulse Washington Week in Review.
If some of these tax provisions pass, a lot of the planning that estate attorneys and CPAs have done over the last 50 years is
basically “out the window” he said. ∆
PHILIP BRASHER: Agri-Pulse Senior Editor
SARA WYANT: Editor of Agri-Pulse, a weekly e-newsletter covering farm and rural policy. To contact her, go to: http://www.agri-pulse.com/