Update on Congress Tax Proposals

• November 3, 2021
• Paul Neiffer

A new Build Back Better Act was released today.  Several changes were provided in this new bill that may be of interest to farmers and other taxpayers.  Likely there will be additional changes and based on the elections last night nationwide this may not even get enacted.

After last week’s release, hardly any bad provisions remain in these bills regarding income or estate taxes.  However, this is still being debated and things will change.  

Here is recap of new tax provisions:

• If appears that the State and Local Tax (SALT) deduction will be increased from a limit of $10,000 to $72,500 for married couples, singles and head of households.  If you file separate or are an estate or trust, then the deduction will be half this amount.  Many lawmakers in high tax states pushed for a full limit on SALT, but this appears to be the compromise.  This will be the limit starting with 2021 tax returns, however, this will be extended to the 2031 tax year (instead of reverting back to unlimited amounts beginning in 2026).  This change allows for increased deductions through 2025 but substantially lower deductions after that date.  This allows Congress to include more revenue to offset additional spending items and partially appease high tax state representatives.
• Continue to apply the 3.8% net investment income tax to all business income including self-rents paid by farm operations to its owners with income over $400,000+.
• Continue to make the excess business loss limitation rules permanent and change the carryover to be part of the excess business loss for the following year.  This effectively means the largest net operation loss that can be carried forward from any one year is $500,000 (adjusted for inflation).  Under current rules a farmer with a $5 million loss could carry forward about $4.5 million and offset up to 80% of taxable income in the following year.  Under this proposal the maximum offset is only $500,000 (adjusted for inflation) in the following year.
• Continue the 5% surtax on adjusted gross income over $10 million and additional 3% over $25 million.  However, if trust or estates retain income, these surtaxes apply at $200,000 and $500,000 of income respectively.

These are the major tax items affecting farm families.  Items that continue not to be in the bill are as follows:

• Any increases in the top individual tax rate, capital gains rate or corporate income tax rate.
• No change to Section 199A deduction.
• No change to lifetime estate and gift tax exemption amount.  It will be $12,060,000 in 2022.
• No changes to grantor trust rules.
• No changes to 1031 exchange rules.

As noted, this is subject to change and we will keep you posted.

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