IT wasn't pretty or even exactly what everyone anticipated, but Congress did pass a last-minute deal on the "fiscal cliff" that provides permanent estate tax relief and gives businesses some certainty moving forward.
In a nutshell, most of the Bush-era tax cuts were made permanent -- with some tweaks -- although higher-income individuals now must pay higher tax rates.
The estate tax, which would have reverted to levels that spelled trouble for family farm operations in the absence of congressional action, was permanently set through the legislation at a rate of 40% on estates valued at $5 million (and adjusted for inflation), or $10 million per couple. Without action, levels would have gone back to $1 million and 55%.
Dale Moore, American Farm Bureau Federation deputy director of public policy, plus others in the agricultural community, has long advocated for a full repeal of the estate tax.
He said the federation is pleased that the "top-shelf priorities" of estate tax and capital gains were made permanent and noted that while increasing the estate tax rate from 35% to 40% wasn't preferred, it nevertheless represents a "compromise from all three corners."
Roger McEowen, director of the Center for Agricultural Law & Taxation at Iowa State University, said he anticipates the inflation-adjusted level to be $5.25 million, and with Iowa land values averaging $11,000 per acre, farms of up to approximately 477 acres would fall below that level, thus eliminating estate tax planning problems for a lot of people.
Danny Murphy, president of the American Soybean Assn., noted that the previous estate tax level of $1 million could have applied to the sale of as few as 80 acres in the Midwest.
Contrary to recent years, when each year brought with it a different level, Murphy said, "This is a big win for agriculture and gives farmers the ability to do estate tax planning with certainty over a time period."
Less to take home
According to the Tax Policy Center, even though the tax cuts have been extended for 98% of taxpayers, 77% of Americans will pay higher taxes in 2013. As of Dec. 31, 2012, the temporary 2% reduction in an employee's share of the Social Security tax expired, and this provision was not extended as part of the fiscal cliff negotiations.
As a result, wage earners can expect their paychecks to be 2% lighter in 2013 than in 2012, at least on the first $113,700 of income.
Section 179 limit enhancements and the 50% bonus depreciation have been extended for the 2013 tax year within the American Taxpayer Relief Act of 2012.
Last year, Section 179 was scheduled to drop in 2012 and beyond. The provision allowed for the immediate write-off of up to $500,000 in qualifying assets in 2011, but only $125,000 in 2012 and $25,000 in 2013. The fiscal cliff deal raised the limit back to $500,000 for 2012 and 2013.
Similarly, the amount of qualifying assets that can be placed in service before requiring a reduction in the limitation was increased from $500,000 in 2012 and $200,000 in 2013 to $2 million in both years.
McEowen called the deal "huge," especially for those in the top individual tax bracket, because it allows assets to be moved and returns amended.
For those individuals above the $450,000 threshold and at higher income tax rates, an election on the sale of capital assets such as a combine or tractor can be revoked and the basis pulled forward to minimize the capital gains tax on the sale, he noted.
In addition, the farm income averaging tool may eliminate about 75% of the tax increase -- or at least defer it for three years.
"If you're expecting 2013 to be a better year than 2012, you can make the income averaging election to pull income out of 2013 and spread it back over the previous three years," McEowen said.
Watching deferred grain sales is also another important option if income is needed in 2012 rather than in 2013, McEowen added.
The agreement extends the 50% bonus depreciation, a cost-effective, temporary measure to support investment and growth, according to the White House.
Murphy said the bonus depreciation changes give farmers incentives to make investments in new machinery and buildings via tax savings.