Do you remember hearing sayings as a kid, and you really didn’t know what they meant? Then later in life you figured it out? Well right now, I’m thinking “Don’t bite the hand that feeds you!” By now, many of you have heard of some of the proposed tax law changes and most recently, the proposal called the S.T.E.P. Act. If you were in the classroom with me, I would ask you to raise your hands if you’ve heard of it, and most hands would go up. Then I would ask, how many of you could tell me what the letters S.T.E.P. stand for? Not near as many hands would go up! So, let’s take a look at this.
S.T.E.P. stands for Sensible Taxation and Equity Promotion. Sensible is not what comes to my mind and when I hear the word ‘equity’. My mind thinks ‘redistribution of wealth’. Clearly the drafters of the STEP Act are completely out of touch with agriculture. I will start with a slight disclosure that recognizes these are proposals and not law yet, so hopefully these things do not all come to fruition. So, what are the chances this new proposal is implemented? If it requires 60 votes, there would be no chance. If it requires 50 votes, hopefully there are some democrats from Ag based states that are sensible enough not to vote for this. There seems to be a group that has a serious animosity toward anyone with perceived wealth.
Here is a quick review. The Federal estate tax limit is currently $11.7 million, per person. The current law is scheduled to sunset to about $5.85 million in 2026. The new proposal sets the sun now all the way down to $3.5 million right in the face of inflating asset values, including real estate!
Let’s look at the new taxes in the STEP proposal, starting with stepped-up basis. Here’s a quick example: Let’s say you own 800 acres valued at $10,000/acre or a total land value of $8 million, plus you rent some ground and therefore, have $2 million of equipment. Your grain and other assets add another $2 million, for a total estate of $12 million. Between you and your spouse, $1 million each would be exempt and the other $10 million would be subject to a “transfer tax”.
Tax on Machinery: The basis in your equipment is probably $0 because you’ve depreciated it out already. So now at death, rather than re-depreciating $2 million of machinery with a full stepped up basis, your estate would have to pay 40% re-capture tax on the $2 million, which would be $800,000 of tax for the privilege of keeping the machinery you already paid for once. Not Sensible!
Tax on Land: Then let’s say the average basis in your land was $3,000/acre and the value at your death is $10,000/acre. Now your estate would have $7,000/acre of gain at a new capital gains rate of 30%, which would result in $2,100/acre of capital gains tax on 800 acres. That’s another $1.6 million of capital gains tax on your land. That’s a total of $2.4 million of new tax so far. Not Sensible!
Tax on Estate: Of course, they’re being super gracious by saying the new tax can be deducted from your estate value, which would get your estate down to about $8 million, which would be still be $1 million over a proposed estate tax limit of $7 million ($3.5 million x 2). That means there would be another $400,000 of federal estate tax, not to mention your state estate tax depending on where you live. Not Sensible!
Add all 3 taxes and there would be $2.8 Million of tax for an estate that had no tax in previous years!
Clearly some of these decision makers do not understand that the reason we have a very abundant food supply and the lowest food prices in the world. The current laws and limits are generally working. Farmers are great for the economy because most continue to live within their means and when we make money we spend it back on the farm. So why cut off the hands that are feeding them? Not sensible!
The kicker to this proposal is that it also taxes any gifts above a very low limit. No worries, they’ll be kind enough to let you complete the gift as long as you pay the tax on it as if you sold it. You will quickly recognize that this is an assault on prosperity of the hands feeding our country, not to mention all the other concerning things that have already been signed by executive order.
At some point the new rulebook will be announced. Hopefully it will leave things closer to the current laws than the proposed changes and then estate plans can be adjusted accordingly. Now is not the time to make a radical decision that could come back to haunt you, but it’s as great time to review how you want your farm distributed through your farm succession strategies. Then be ready to adjust your estate plan for the tax implications as soon as we know the rules.
My words for their proposal is, Senseless Taxes Ending Prosperity! That would be a bad S.T.E.P.