Here They Go Again

• March 29, 2022
• Paul Neiffer

After having the Build Back Better and related tax proposals get knocked down by Senators Manchin and Sinema, President Biden and the Administration are at it again. They just released their budget proposals recently and they include the following major tax proposals that may affect farmers:

• Raise the top tax rate to 39.6% on income over $400,000 ($450,000 for married couples);
• Raise the capital gains rate to 39.6% on income over $1 million;
• Apply a capital gains tax on any transfer of appreciated property either during lifetime or at death,
• Have assets held in trust be “marked-to-market” every 90 years beginning with any trust after 1940. No discount is allowed for partial interests. Transfer from/to a trust would be a taxable event. An exclusion of $5 million per person would apply indexed for inflation. Tax on illiquid assets could be paid over 15 years;
• Minimum tax on persons with net worth over $100 million. A 20% minimum tax would apply on total income earned or unrealized appreciation. First year tax could be paid over 9 years, thereafter, over 5 years;
• Grantor Retained Annuity Trusts (GRATs) would be required to have a minimum term of 10 years. Essentially eliminates the zero gift tax GRAT. Annuity payments could not decrease during the term and no tax-free exchange of assets would be allowed;
• Grantor trusts would now make any sale to the trust become taxable and any payment of the tax of the trust income would be treated as a gift;
• Limited discounts on the valuation of promissory notes between related parties;
• Special use valuation would be bumped from current $1.23 million to $11.7 million indexed to inflation;
• Trust reporting of assets would be required if value over $300,000 or $10,000 of income;
• Make changes to the Generation Skipping Trust exemptions to eliminate the use of dynasty trusts to skip more than two generations. Existing trusts would be assumed to be created on the date of enactment;
• Carried interest income would become ordinary income instead of capital gains;
• Limit tax deferral to $1 million on Section 1031 exchanges;
• Depreciation recapture on the sale of real estate. Current rules require “depreciation recapture” but it is at a maximum tax rate of 25%. This provision would eliminate that maximum rate. This only applies if couples earn more than $400,000.

Most of the news on the budget relates to the minimum tax for the most wealthy. However, as you can see, there are many provisions that would hit farmers and their families. This is a proposal and remember only Congress can write the laws (except the administration during the pandemic) and these proposals stand very little chance of making it to law.

But we will keep you posted on these proposals.

I am also providing the podcast audio I did for our Farm CPA Podcast Presented by Top Producer that I taped this morning. It is the raw unedited recording with a small pause at the beginning and end but outlines in more detail what we provided above.

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