What is in this article?:
- Important Year-End Tax Implications For Ranchers
- Section 179 bonus depreciation
As Dec. 31 approaches, the tax policy debate remains unfinished in Washington. What are the implications for ranchers?
When it comes to tax planning for this year and next, here’s the only thing that’s certain – you will get to pay. Beyond that immutable fact, however, the only thing certain about the current state of tax policy is its uncertainty.
If Congress doesn’t act before year’s end, federal tax increases will go into effect on Jan. 1. That will raise rates on virtually all taxes for all taxpayers, including income, capital gains, dividends, wages, gifts and estates.
The most likely scenario, according to Roger McEowen, director of Iowa State University’s Center for Agricultural Law and Taxation, is that Congress will wait until early 2013 to make any changes in the tax code. “I think it will come in January and be on a retroactive basis, which is nightmarish from a tax-planning standpoint.”
The problem, says Rob Gunther, a CPA and ag tax expert with Frost PLLC in Little Rock, AR, is that many of the 2010 Tax Act provisions that expire on Dec. 31 will directly affect farmers and ranchers.
Potential estate tax changes
Estate taxes are a good example. For 2012, decedents’ estates have to pay estate tax on amounts above $5.12 million at a top rate of 35%. The exemption is scheduled to revert to $1 million in 2013, however, and the top rate will increase to 55%.
Which is why, Gunther says taking steps before the end of the year to manage your estate taxes is critical.
“The 2010 Tax Act increased the ability to transfer $5 million of wealth ($10 million for a married couple) from one generation to the next,” Gunther says. “We’ve never had this opportunity before.”
Generally, estates valued at more than $10 million for a married couple will benefit, he says. Given escalating ag land values, you may be closer to that high-water mark than you think. “I think there are more people in that position than take the time to consider it. It doesn’t take very long to get there these days.”
However, gifting cash isn’t your best move, he cautions. “What you want to consider giving away are assets that are highly appreciating; any closely held business interest is generally where most appreciation occurs.”
Nearly any type of business structure can facilitate the gifting of closely held business interests. You don’t have to give the whole amount, Gunther says. It can be any amount you want.
Nor do you have to worry about giving up control of the operation. Non-voting stock or different classes of LLC units may be used. And both you and the beneficiaries can take advantage of various discounts that can be applied to the stock’s value.
Those discounts, which include lack of marketability and lack of control, can range from 20-40%. “So say you have $10 million of actual value. After the discounts are applied, you may only have $6 million, so in reality, you’re actually moving much more than meets the eye,” Gunther says.
Estate Transfer Resource: Consultants Provide Tips On Estate Transfer
If you and your CPA determine that your estate isn’t large enough to take advantage of this opportunity, Gunther says you may be better served to let your assets pass through your estate when you die because your children will get a stepped-up basis on those assets.
“Basically what that means is any real asset that passes through your estate will wind up in your children’s hands with a basis equal to the market value at your date of death,” Gunther says.
If Congress doesn’t act on taxes this year, the exemption will decrease to $1 million on Jan. 1. However, Gunther doesn’t expect it to stay there. “Some proposals include bringing the exemption back to $3.5 million,” he adds, which is where it was previously. But even if that happens, you’re potentially leaving a $1.5-million exemption on the table if you wait until next year, he cautions.