Dear Michael: It looks like we have a new president in Joe Biden. What does this mean for estate planning? Are we going back to income and estate taxes that will put farmers out of business? How long do we have before all these tax changes come into being? – Taxed to Death.
Dear Taxed to Death: Based on the probability that Joe Biden wins the election – if all the court cases are cleared – he had some interesting things to say about how taxation on both income and estates would change.
On income taxation, he’s talked about raising the taxes on people who make more than $400,000. In theory, that doesn’t sound so bad because the current tax rate is 37 percent and that would return to 39.6 percent, a modest increase.
However, he has also talked about bringing back the Alternative Minimum Tax or AMT. The AMT was modeled so that the more you made, the less in total deductions you are allowed.
Under the previous law, if the AMT is reinstated, the total amount of your income that could be deducted would be capped at 28 percent, so a person earning $400,000 would only be able to take deductions of $112,000 and the remainder would be taxed. This is a graduated tax and the more you made, the less percentage of your income you could deduct.
As you may remember from 2016, the AMT affected a lot of people it was never intended to affect. If you earned $100,000 total income, you could only deduct up to $28,000. When you have mortgage interest, child care expenses, vehicle usage for business, $28,000 doesn’t go very far.
It will be interesting to see if this AMT is only applied to those making more than $400,000 as was promised and how the deductions will be handled.
In addition, higher earnings would be subject to Social Security and payroll taxes. Social Security is currently capped at $137,700, however, Biden has talked about ways of rescuing the Social Security system/payments throughout his campaign and changing this cap was one idea.
Estate taxation will not only change but fundamentally change. The best way to describe how it works is to use the Canadian estate tax system.
In Canada, their estate tax laws are akin to what the Biden campaign has stated in that they want all estate assets to be taxed at capital gains rates by the estate of the decedent at the time of death.
Unfortunately for Canada, capital gains taxes are 50 percent at the time of death (with the normal provisions for spouses not paying until second death, etc.) They do have a Lifetime Capital Gains Credit of about $880,000/person which can be used at death.
In the United States, our capital gains rates are taxed at 0 percent up to a single income of $40,000, and 15 percent on any gains up to $441,450 and 20 percent on gains higher than this number. One would “assume” there would also be a Lifetime Capital Gains credit and, based on what Biden’s campaign has put out, this credit would equal around $5,750,000 per person in total capital gains.
This might seem like a lot, but for larger farms, who bought property at low values dating back years and years, and having all of this capital gain come in on one year – date of death – that $5,750,000 might disappear in a hurry.
For many people, although they won’t have to pay any capital gains/estate taxes upon death, the sheer amount of paperwork (certified appraisals, searching for original costs on land, etc.) is going to create costs of settling any farm estate in the tens of thousands.
Getting Certified Appraisers today is not easy. Fifteen years ago, all the appraisers got together and had legislation passed whereby you need a four-year degree and two years of apprenticeship (unpaid) to get certified. As you can guess, not many people have gone into appraising due to these restrictions and there will be an overwhelming need for appraisals.
Of course, all of these items are merely campaign rhetoric until they get passed into law and if the Democrats don’t have a majority in the Senate, then nothing will get done (with the exception of Executive Orders). Most laws go into effect on July 1 of the year unless they occur too close to July 1 and then it will roll on to Jan. 1 of the following year.
I have no idea or expertise to know, but the next six months should be interesting.
Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at KeeptheFamilyFarm@gmail.com.