Real “reforms” do not sunset in 7 years and do not ignore the roots of the problem being reformed. In the case of tax, the root problems are gluttonous deficit-spending coupled with an insatiable desire to control other people’s lives through regulations and tax policies. Enough of my Mr. Negative, though.
There are more good changes than bad for farmers and ranchers with the new tax laws. But, as you might expect from a Congressionally-operated farm, there are tares sown in with the wheat, so this paper will assess the good, the bad, and the as-yet uncertain.
I will provide a summary of the changes and then some early ideas for strategies to make the new tax laws work for you.
Summary of Changes
The changes relevant to farming and ranching are to three main categories of the tax code: 1)Estate, Gift and Generation Skipping Tax, 2) Personal Income Tax, and 3) Corporate Income Tax.
Estate, Gift and Generation Skipping Tax
1.The exemption amount has doubled to $11.2 million for individuals, and $22.4 million for married couples. You can gift or bequeath up to those exemption amounts without paying the 40% federal estate/gift/GST tax.
2.Additionally, beginning in2018, you can gift $15,000 ($30,000 per married couple) to an unlimited number of recipients per year,without it counting against the above exemption amounts.That is a $1,000 per person per year,increaseover the 2017 amount.
For example, a husband and wife rancher have 3 children, who each have 2 childrenof their own(9 gift recipients). They could give $30,000 cash to each of their children and grandchildren per year without affecting their combined $22,400,000 exemption. So, if they both died in an accident at the end of 2025, they could have given away and/or bequeathed $24,290,000,free of the 40% estate and gift tax.
1.The high exemption amount ends at the end of 2025, after which it reverts to the current $5,000,000, indexed for inflation ($5,490,000/$10,980,000in 2017).
1.What happens if you and your spouse gift 22.4 million in the next 7 years, but don’t die until 2026 or beyond? Will your estate have to write a check to the federal government for $4.96million (40% of $12.4 million).
The prevailing opinion is no, there’ll be a legislative fix for that. But it is not 100% certain.
What if you and your spouse gifted $22.4 million of farmland, stock and equipment? Would your donees have to sell the family farm to pay your estate tax bill after 2025? It is almost certain that a regulation or a law will prevent that.
But the “almost” part causes me to leave it in this category.