By TIM ALEXANDER
BLOOMINGTON, Ill. — While President Biden’s Build Back Better Plan is still in the discussion phase, farm financial advisors are already discussing possible changes to the tax code recommended by the House Ways and Means Committee. Some of the tax components included in the House version of Build Back Better, announced Sept. 13, will be detrimental to many farmers and ranchers, according to K COE ISOM manager Beth Swanson, and director of government and public affairs Brian Kuehl, who spoke about the possible tax changes during an Oct. 7 webinar hosted by the Illinois Soybean Association.
“We’re looking at tax incentives, estates, gifts and trusts, businesses and individuals,” said Swanson, leading off her segment of the webinar, The Coming Changes to the Tax Code: What They Mean for You and Your Farm. “The good news is the House version includes the extension of green energy credits at least until 2031. These credits include solar panels for your house, and also include a credit for energy-efficient improvements to buildings. There are also credits for producing electricity from renewable sources, such as solar or wind, or a credit for constructing those assets. The House version recommends increasing all of those credits (and more).”
Several other tax credits and incentives of importance to farmers, such as reimbursement for natural disaster recovery construction expenses, are also set to increase or be extended under the House plan. The controversy, Swanson explained, originates with the tax increases proposed by the House Ways and Means Committee.
“Changes to the estate and trust provisions will require your attention before Congress acts, rather than after the president signs the bill,” Swanson said. “The first item is the reduction of the estate and gift tax exemption. In 2021 the estate tax exemption is about $11.8 million. The committee would reduce that exemption to $5 million per person, adjusted for inflation, beginning in January 2022. What this means is that the number of gifts you can give in your lifetime and the amount of assets you can own at your death without being subject to transfer taxes is cut in half.”
According to a recent University of Illinois study, estate taxes currently impact about three-tenths of one percent of Illinois farmers. Closer to four or five percent of Illinois farmers would likely be impacted by the proposed estate tax exemption of $5 million, Swanson projected.
“Nationwide, in 2019 when the exemption amount was about $11.5 million per person, about 6,400 estate tax returns were filed, and only about 2,600 of those owed any tax. In contrast, in 2016 when the exemption was $5.5 million, there were 13,500 estate taxes filed with about 5,500 actually owing estate tax,” she said.
Swanson cautioned that under new oversight measures recommended as part of the House tax plan, the only way to legally remove assets from an estate would be via outright gifts or by transferring assets in irrevocable trusts to certain other trusts. She advised speaking with a financial advisor “within the next 45 days or sooner” to learn how assets can be legally protected under the House-suggested tax code changes.
“We are also concerned because it is unclear from the legislative language whether farm real estate owned by an individual actively engaged in farming but leased to a third party is still considered an asset or a passive asset,” said Swanson. “If you have plans to sell or transfer any of your assets in the next few months or years, we definitely recommend you talk to your advisor as soon as you can about how you can accelerate that timeframe.”
Significant changes will also be coming to businesses and individuals under the House version of Build Back Better. Corporate tax rates for businesses reporting taxable income of over $5 million will be boosted to 26.5 percent, while corporations with taxable income of less than $400,000 will see a tax cut of approximately three percent. A slight tax decrease will also be in store for those businesses reporting between $4 million and $5 million, according to Swanson.
Individual tax rates will be increased back to pre-Trump administration levels under the House plan, with individuals at the top of the income tax bracket paying close to 40 percent. The proposal would shrink the level of the top tax bracket to $450,000 per year in income. In addition, the top capital gains rate for those earning more than $450,000 will be increased to 25 percent, Swanson said.
The Senate Finance Committee has been working on its own tax package that is said to be parallel to the House package. But a final bill, which must be approved by both the House and Senate before moving to Biden’s desk, will likely contain some compromises, Kuehl reported.
“I think there is a high likelihood the Democrats will pull this off,” he said. “I think there is a lot of pressure for the progressives to get a deal. President Biden is certainly applying that pressure. But I think most Democrats know they need to deliver something, or the 2022 (midterm) elections are going to be very bad for them. If they can get this package done, they will have a full head of steam.”