INDIANAPOLIS — With the end of the year approaching, farmers
may be looking at formulating taxes, secession and estate plans for their farms,
and some may be thinking about selling their farm property.
Accompanying increased land values, the estate tax will rise
from 35 percent to 55 percent and the amount of money excluded from the estate
tax will drop from $5 million to $1 million if Congress does not act on taxes by
President Barack Obama has pushed for a 45 percent rate on
estate assets of $3.5 million or more — a reversion to the estate tax exemption
and rates at 2009 levels — though Congress continues to be embroiled in
negotiations on the fiscal cliff.
It will be difficult for many farmers to get over the
proposed estate tax threshold, so it is smart to remain mindful of retaining
control of farm assets, noted Michael Fritten, principal of the Real Estate Team
at Somerset CPAs, who spoke during the educational seminars hosted by Hoosier Ag
Today at the Indiana-Illinois Farm and Outdoor Power Equipment Show.
“If this tax change compromises your current lifestyle,
there are a lot of different strategies you can utilize, including
family-limited partnerships and limited-liability corporations, where you can
transfer the non-voting stock to the next generation,” he said.
Farmers who may be thinking about selling the farm probably
are concerned about how to treat all the family members fairly, as equity and
profitability do not always go hand in hand.
Fritten said that it’s a great time to sell the farm due to
both higher land prices and the capital gains tax, which will increase from 15
percent to 20 percent Jan. 1.
Taxes from the Affordable Care Act also will take effect
next year, including a 0.9 percent Medicare on wages tax for spouses earning
more than $250,000 per year and a 3.8 percent surtax on net investment income
for people earning greater than $250,000 per year.
For farmers looking to sell their farm, the capital gains
tax will be their net-investment income, Fritten said.
“If a family has farmland worth $9 million and the family’s
cost basis is $4 million, their tax savings in 2012 will amount to about $5
million in taxable capital gains,” he said.
“Selling the farm in 2012 and 2013 would net the family an
Farmers can employ additional strategies including multiple
tax minimization and deferral on their farms.
They have the potential to bunch income in 2012 when the
2011 deferred income will be recognized, the accountant said.
Crop insurance proceeds and forced livestock sales also will
be recognized in 2012 as livestock farmers have been forced to liquidate and
sell quantities of their herds, he said.
Tax provisions of bunching income enable farm families to
defer the proceeds on crop insurance.
Farmers could have a one-year deferral and potential for a
four-year deferral for crop insurance proceeds for the current-year crop,
Farmers who received proceeds in 2012 for crops and normally
report their income must have proceeds due to physical damage rather than
revenue protection, he said.
For livestock sales, if a farmer is a cash-basis taxpayer,
he or she can report their practice in the following year, he said.
Farmers have up to a four-year elected deferral to replace
their animals and defer gain over a period of time, Fritten said. If they have
not replaced their livestock at the end of the four years, they will continue to
defer that gain, he said.
The Indiana General Assembly passed a law this year phasing
out the Indiana inheritance tax at a rate of 10 percent per year over a 10-year