Will Net Investment Income Tax Disappear in 2017
The House Republicans on Monday released a new 43 page “manager’s amendment”. This was primarily done to placate some of their more conservative members who would have voted against the original proposed plan. One of the items in the amendment accelerates the repeal of “Obamacare” taxes from 2018 to 2017. This includes the “dreaded” 3.8% net investment income tax that is applied to investment income above a certain threshold. I know many of our farmers have been faced with this tax and in some cases, the extra tax has exceeded $100,000.
The amendment also proposes giving the Senate a buffer to increase the amount of tax credits for older Americans and eliminates the ability to deposit excess tax credits into Health Savings Accounts. There are also some proposals allowing states to implement work-requirements for Medicaid recipients and allows itemized medical deductions in excess of 5% of gross income instead of the current 10% (before Obamacare, it was 7.5% and the tax reform would eliminate the deduction completely).
The net investment income tax imposes an extra 3.8% income tax on the lower of net investment income or the amount that your gross income exceeds a threshold ($200,000 for singles and $250,000 for married couples). Investment income includes interest, dividends, rents, passive income, etc. Farmers who self-rent their land to their farming entities are not subject to this tax, however, if the land gets rented out to others, it potentially can subject the net rent income and the gain from selling the land to the tax.
For example, assume a farmer has 2,000 acres of good farm land in Illinois. He paid $500,000 for it many years ago and it is now worth $25 million. Let’s suppose he sells it and reports a gain of $24.5 million subject to the 3.8% net investment income tax. This would create extra federal tax of $931,000 plus certain states are now piggy backing on this tax and assessing an additional net investment income tax.
As you can see, this tax can add up in a hurry and it would be great if we can get a repeal effective to January 1, 2017. We will keep you posted.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Do you have any info. on whether it is best to do a 3 month harvest lease, whick Kubota offers, at about 2,000/mon. for a 131 horse tractor, vs buying the tractor for about 65K on their 0 interst plan for up to 7 yrs.? I really only use this type of tractor for haying season. I have 3 other tractors I use for other haying jobs and throughout the year. They are all fully depreciated. I’m in the 28% marginal tax bracket.
Thanks