In 2017, up to $6,350 of earned income per child are exempt from taxation. Further, the parent does not have to pay FICA tax for their children under 18 who work for them or their partnership. Corporations do not have that same exemption from paying FICA tax, regardless of who owns it. These earnings by the child can be considered income for a ROTH IRA. The ROTH IRA, as post tax dollars, can be withdrawn without penalty at any time (to include for education), only the earnings will be subject to tax. If correctly drawn out for education, even the earnings are not subject to the early withdrawal penalties. ROTH IRA dollars are not a resource for Federal Financial Aid Considerations; however, by comparison, cash in savings accounts are considered assets. If the child doesn’t use funds for education, they continue to grow as a retirement savings. The disadvantage to a Roth IRA account is the low amount (up to the amount of earned income the child makes or in any case $5,500 maximum) that can be contributed each year.
Agricultural endeavors have an increasingly small margin for error. Operators use GPS guided equipment to precisely apply the calculated amount of seed, fertilizer, and chemical to the ground to produce a crop with the highest potential return on investment. Marketing decisions are made after considering macro and micro economic information sources, predictions on weather, and considerations for next year’s cash demand needs for the operation. Increasingly, specialists are consulted for agronomics, equipment upgrades, and marketing decisions.
Despite all the external support available, sometimes, internal record keeping can make or break an enterprise. Not keeping receipts because of assumptions regarding the other side keeping the copy, failing to document the who, what, when, where, and why of a purchase, or failing to keep accurate records of what the business is doing can come back to bite the operation years down the road.
It is so easy to put off the hard work of memorializing, filing, and storing the supporting pieces to the story of the operation. The current climate of “FAKE NEWS” and conflicting stories from once reputable news organizations will have an impact far beyond the next election cycle. It frames the finder of fact in a future dispute. Documentation and records and the ability to retrieve them become more important, not less, in this digital age. Having “the goods” when you need to produce them can be critical to establishing the legitimacy of the data, and proving that it is not fabricated.
Take a look at your record keeping in your operation. Can you provide the supporting data to the purchases, the agreements, and the transactions you undertake? Sometimes, something as simple as a receipt of payment can establish rights and responsibilities of parties for years to come. When a party to that transaction has selective amnesia, it becomes critical to be able to prove each element of the transaction.
Tax Policy Implications Run Far Deeper Than a Temporary Reprieve
I am reluctant to write about the pending attempt to change the tax code. I haven’t even signed up for the annual tax school update, because I am certain information presented in November will be stale by December with the way things are moving in the federal landscape.
However, some larger, broad brush policy strokes are clearly being established, and regardless of five or seven tax brackets, the implications to the rural portion of the country are beginning to be seen. Of course, the 70 million Americans who don’t make enough to pay taxes, or the 1/3 of those who technically should pay but have enough exemptions to not actually pay, are not impacted at all by these proposed changes.
First, what everybody is asking about, rates. The proposed tax rates from the House:
12%: $0 - $45,000 for individuals ($90,000 for married taxpayers)
25%: $45,001 - $200,000 for individuals ($260,000 for married taxpayers)
35%: $200,001 - $500,000 for individuals ($1 million for married taxpayers)
39.6%: $500,001+ for individuals ($1,000,001+ for married taxpayers)
Under this plan, by the year 2027, 31% of the “middle class” will be paying higher actual taxes than under the current law due to roll backs.
The Senate brackets start at 10% and move six times, up to 38.5%. Both house and senate plans eliminate, or limit, deductions for mortgage interest, state and local taxes paid, property taxes, retirement savings, personal deduction credit, educator expense, AMT, and alimony. The house does away with student loan interest deductions.
Most likely, the senate’s tax plan impact is a 10% reduction for those under $30,000 in income, those under $70,000 would see about a 7.15% cut in the first year, but with the loss of deductions, taxes actually go up for people earning less than $200,000.
First, the Estate Tax “repeal”, or its sexier name, the “Death Tax”. Current suggestions would raise the death tax bar from the “low” $5.49 million dollars of property that EACH PERSON can transfer during life or death before paying 40% tax to $10 million per person. That would be about 2000 acres at $10,000 per acre (with no debt against it). “Step up” in basis would be allowed for property held at death despite rumors that it was on the chopping block. Yes, when the thresholds for estate tax were traumatically lower, people were impacted and hard choices to stay or farm had to be made. I personally find the idea of a death tax offensive and socialist. However, many, many more people will have capital gains issues. Heirs selling newly inherited property, and putting that capital to use in projects they understand and are passionate about is good. Heirs who are tax adverse and hang on to property because they don’t want to pay taxes rarely invest in the land or the local community. That is bad. Those heirs, as a generality, do not care about beginning farmers, 4H fund raisers, or continuing any one specific person’s farm operations. They are, rightly so, focused on a return on their asset. The retention under the plan of step up in basis is a far bigger deal than the elimination of the estate tax. With the retention of 1031 tax free exchanges, which were also in doubt of continued authorization, this plan means that farm real estate transactions may continue as we have come to see them in recent years.
Second, the proposals do little to impact those who earn less than $260,000 of taxable income. Many farm operations have a large gross income but have taxable income less than that number. If you make more than that through actual work and not rental or passive income, the tax adjustments are a negative. The cuts are largely available to those who do not need to work to provide cash. Those who make money through S Corp holdings and real estate partnerships will be better off than those who earn similar money via work like CPAs, counselors, dentists and yes, lawyers.
Third, the deduction for medical expenses would be eliminated, as have the deductions for student loan interest, tax prep expenses, moving expenses, unreimbursed employee expenses, and alimony. That is concerning, as many older land owners look to a contract sale to move the farm into the hands of the next generation. As they realize the capital gains, they have increasing medical expenses in the form of nursing home or hospital bills to offset the tax. Student loans are quite expensive and are supposed to be taken to invest in higher paying jobs and further career advancements. Loan rates set by the government, which are now also not deductible, when determining taxes to pay to the government, looks like a nice continued source of taxation. Currently, each dollar of income is reduced by each dollar of interest paid for student loans until a substantial income threshold is met. The removal of this deduction is a wet blanket on higher education loans, which may not be a bad thing. Free access to government loans without a thought on pay back prospects needs to be curtailed. Four year degrees costing $100,000 in leisure studies seems like a long shot to get a return salary commensurate with the education investment.
Fourth, earned income tax credit (EITC) stays. As a tax preparer, it has been a source of frustration to jump through the hoops to ensure those who are entitled to it can claim it, because of the fraud associated with the program. It also skews towards rewarding partial, but not full employment, and off the books work to keep income reporting artificially low. I am not a fan of the EITC and wish it would have gone on the chopping block. It almost has a “buying low income votes” feel to it, and I doubt it will ever be eliminated.
Fifth, under the proposal, businesses conducted as sole proprietorships, partnerships, and S corporations would be taxed at a rate of 25%. However, businesses that offer "professional services", read doctors, lawyers, and accountants who don’t work for large companies don’t get this break. Other business owners can choose to categorize 70% of their income as wages (and pay the individual tax rate) and 30% as business income (taxable at 25%) OR fix the ratio of wage income to business income based on capital investment. Corporations that pay tax on profits (c corporation) at the corporate level drops to 20%.
Finally, plans increase the ability to expense equipment purchases instead of slowly depreciating them over the time of their expected useful life. Some farm operators who have a strong desire to not pay tax use new equipment purchases with immediate expensing to erase profit. They run into trouble in future years when the payments are due and the profits are shrinking. The payments are made with dollars that are profit, and not associated with the expense, as the expense was already consumed in a prior year.
For illustration purposes, imagine a widower with social security and just enough farm ground (288 acres tillable $2.88 million valuation) to cover her current nursing home expenses, with rental income at $250 per acre. She has a daughter who would like to own the farm, as she rents it currently. It’s a fact pattern that is, plus or minus an annuity payment, is fairly common. We will compare her facts to the policy implications of what is being proposed in Washington.
Our widower likely doesn’t have an estate tax problem. If her daughter has a viable wife and husband operation with an equipment line of $3 million dollars (which is easier to accumulate) and 1500 acres free and clear, she would be flirting with the new proposed cap for estate taxes. Using discounted gifting tactics can stretch that cap a ways past the $20 million mark.
The widower in our example would lose a substantial deduction and begin to pay on her income with the elimination of medical payments as an expense deduction. This will make her less likely to sell the property on contract as she will pay capital gains tax on the sale with no corresponding deduction like she would have under the current system. This deduction loss will not be offset by the increase in standard deductions, as medical expenses for nursing care are well above $50,000 per year in most locations.
All of this is, of course, subject to change. The concern is that the passive investors (or idle rich if you will) are receiving a break on income generation and on the death tax, while those who work continue to pay into the system.
Farming is complex, and it makes sense that the plan to move it to the next operator, whether they are family or not, is going to be complex as well. “Dying well” is hard to do, even in a non-farming context, when you must also balance competing interests between your children who may all want your stuff.
We recommend that a complex plan with business interests, also intertwined with family concerns, be an open plan. If the plan is open knowledge, then the children and business partner children can make plans for the future.
Having disclosures in place for who can understand the plan and look at it can yield beneficial results to your family for generations.
Consider the difference between:
A: A farming daughter who keeps a war chest of cash and liquid assets on hand to buy out her siblings when mom and dad die because she has no idea what the plan is post death for the acres she currently crop shares with her parents.
B: A farming son who knows he has a buy/sell agreement, and a first right of rents on ground that he and his non-farming sibling are both part beneficiaries on.
A forty-acre tract lies between these two operations. At auction, which operation is likely to expand, take risks, and grow, and which one is likely to continue to mold?
An office practice that has been beneficial is to bring the clients and children in (no in laws) for a “work through” of the parents established estate plans. The children get some idea now of what the plan is and it cuts against undue influence concerns when the client is still alive and confirming the plan.
A Warm Hand Now or a Cold Hand from the Grave.
What makes sense from a planning stand point may not make sense on a grander scale. Giving in contemplation of death or decline with the grim reaper on the door step is not a great plan. Giving away well in advance can be part of a well-organized estate plan.
Gifts are tricky to accomplish effectively. They are required to be made at a point when the client is willing to let go of the asset and the control associated with it. Most people hang on to assets well past when it is appropriate to consider giving them away.
Some of the considerations that should be contemplated before enacting a gift plan are:
* Impact on Medicaid eligibility.
* Realistic fair market value.
* Encumbrances against property.
* Impact on basis. Retained basis.
* Expected value increases.
* Capital gains: $250,000 exclusion for a single person ($500,000 for married couple) for primary principle residence.
* Gift tax.
* Intent of recipient, and is that recipient reliable.
* Family impact.
* Loss of control. A gift is a gift.
Estate planning for a farm operation can be difficult to discuss with loved ones; however, they will be thankful you did as it will be one less burden your family will have to deal with after you are gone. If you are ready to plan for your future, and your family’s future, set up an appointment today to discuss how we can help you make this process easier.
Look Before You Leap
In the last several months, the Iowa Court of Appeals has issued opinions that reinforce a common-sense sentiment; look before you leap. In two separate cases, adjoining landowners engaged earth movers and heavy construction operators to build roads, but failed to get a survey to determine what ground they actually owned, thus failing to build the road on their own land.
In one matter, the road moving party is facing nearly $20,000 of cost to move the road back onto the property that the party owns and off of his neighbors. That figure doesn’t include the cost of installing the road, the subsequent law suit, or the appeal. In the other matter, the court awarded triple damages for the removal of trees belonging to the adjoining property owner, and the cost of restoring her property to the condition it was in prior to the encroaching road. In both matters, the cost of a survey would have been 10% or less of the cost these road builders ultimately paid.
Dicamba and its continued use.
Dicamba is a chemical that is used to attack weeds resistant to the popular herbicide glyphosate (known by its trade name Roundup). Dicamba has been the source of widespread crop damage this summer, as it was sprayed incorrectly or applied with unintended results. Resistant weeds are becoming more of a production problem for crop farming enterprises. These resistant weeds can mean more passes across the field to control weed growth, which cuts into already tightening margins for operators.
The EPA is moving to allow farmers to spray dicamba next year, but with additional rules for its use. Reuben Baris, acting chief for the herbicide branch of the Environmental Protection Agency’s (EPA) Office of Pesticide Programs, said the agency had not yet determined what steps it would take to address these problems.
Baris commented that the EPA is in negotiations with Monsanto and BASF (which sell dicamba) to make changes regarding how they are used.
It appears that the EPA will look to state regulators to help create a responsible application requirement. States have taken a broad range of actions, including contemplation of placing the chemical on a “do not spray” list for the coming years.
Iowa Citizens for Community Improvement Back Door Attempt to Stunt Livestock Industry Defeated.
ICCI, long known for being anti-production agriculture, submitted a petition to the Iowa Environmental Protection Commission to make the installation of additional livestock facilities very difficult, if not impossible. The group submitted the petition after getting themselves on county level board of supervisor’s agendas in an attempt to get the local boards to endorse their petition.
The proposal would have increased the setback distances, given higher credit for pollution control, and increased the amount of compliance required to obtain a construction permit. The Iowa DNR, who administers the program, was against the petition’s demands.
Sumner, Iowa Attorney practicing in Iowa primarily in Ag Law, Bankruptcy, Estate Planning, Real Estate Law. Lawyers at the Dillon Law P.C. are dedicated serving Iowa, including but not limited to the cities of Allison, Charles City, Cresco, Decorah, Des Moines, Dubuque, Elkader, Grundy Center, Independence, Manchester, New Hampton, Waterloo, Waverly, Waukon, West Union & Vinton, and the communities that makeup Allamakee, Benton, Black Hawk, Bremer, Buchanan, Butler, Chickasaw, Clayton, Delaware, Dubuque, Fayette, Floyd, Grundy, Howard, Polk, Winneshiek, counties. © 2021 Dillon Law P.C. Sumner Location | 209 E. 1st Street, Sumner, IA 50674 Volga City Location | 502 Washington St, Volga City, IA, 52077. West Union Location | 103 N. Vine Street, West Union, Iowa 52175 West Union, Iowa 52175 We are there most Fridays 10-3 and by appointment. Telephone: (563) 578-1850 Email: firstname.lastname@example.org Home | Attorneys | Blog | Ag Law | Bankruptcy | Estate Planning | Real Estate Law | Contact | Iowa Ag Law Attorney Sumner Taxation Commercial Transactions Production Contracts Labor Hobby Farm Liability Bremer Fayette County Lawyer