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Tax Cuts for Farmers – New report

USDA and Staff Reports

U.S. Secretary of Agriculture Sonny Perdue last week highlighted a new report showing the positive impacts of President Trump’s Tax Cuts and Jobs Act (TCJA) on American farms. Six months after the President signed the tax cuts and reforms into law, the U.S. Department of Agriculture (USDA) Economic Research Service (ERS) has released a report, titled “Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households.”  The report examines in detail how the historic tax cuts and reforms will alleviate the tax burden on American farms to help them grow and prosper.  According to the report, average tax rates are expected to decline across all farm sizes and commodity specializations and fewer farm estates will be subject to the Death Tax.

“Most family farms are run as small businesses, and they should be able to keep more of what they earn to reinvest in their operations and take care of their families,” Perdue said. 

“Simplifying the tax code and easing the burden on farmers will free them up to make choices for themselves, create jobs, and boost the overall American economy.  This report just shows what we knew all along: the tax cuts and reforms will benefit farmers.”

The TCJA significantly reformed the Federal income tax system, including individual and business income tax rates, business expenses, taxable income deductions, and the alternative minimum tax. The TCJA also doubled the Federal estate tax exclusion. The USDA ERS report estimates the impact of current Federal income tax provisions on farm households by using 2016 tax-year data.

According to the UDSA report, Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households, the death tax is cut significantly.  

DEATH TAX: The Federal estate tax has applied to the transfer of property at death since 1916 as part of a unified system of transfer taxes. While the tax has been amended many times, the estate tax, as well as the gift tax (imposed upon transfers prior to a person’s death) and the generation-skipping transfer tax, has never directly affected a large percentage of taxpayers; the IRS estimates that between 1934 and 2008, only 1.8 percent of adult deaths, on average, generated a taxable estate valued above the exclusion amount.24

The TCJA keeps the estate tax framework but doubles the exclusion amount to $11.18 million per individual.25 Only the estate of a decedent who, at death, owns assets in excess of the estate tax exclusion amount must file a Federal estate tax return. However, only those returns that have a taxable estate above the exclusion amount—after deductions for expenses, debts, and bequests to a surviving spouse or charity—are subject to tax at a graduated rate, up to a current maximum of 40 percent.   

The exclusion amount for estates has increased significantly since 2000 (see fig. 5), resulting in a decrease in the number of farm estates that must file an estate tax return as well as the number of estates with any tax liability. Unsurprisingly, there was a steep decline across all of these measures after the start of the Great Recession. However, the number of estate tax returns and estates with tax liability in the postrecession time remained well below their peak level in 2007–08 (fig. 6). This was largely driven by an increase in the exclusion from $2 million in 2008 to $5 million in 2011. On the other hand, the estimated total tax liability owed by farm estates returned to prerecession levels even as the exclusion increased and the maximum marginal tax rate went down, primarily due to the growth in farm real estate values.

The exclusion amounts and estate tax rates affect all estates, not just farm estates. But over the years, a number of targeted provisions have been enacted to reduce the burden of the estate tax on farms and small business owners. These include a special provision that allows farm real estate to be valued at farm-use value rather than its fair-market value and a provision that allows for installment payments (available to all estates).26 Farmers and other landowners may also donate an easement or other restriction on development and exclude the value of the donated easement from the estate, providing additional estate tax savings.

The TCJA continues previous law by allowing the basis in the property acquired from a decedent to be stepped-up to the value of the asset at the date of death. This “step-up in basis” rule essentially eliminates any tax liability for the appreciation of the property that occurred prior to the prop- erty owner’s death. The rule is significant since much of the appreciation in the value of assets in the estate has never been taxed—either as income or capital gains—and thus will escape taxation completely. 27 Heirs only pay capital gains tax on any increase in the value of the assets after they inherited the property.

24 IRS Historical Table 17.

25 Applies to decedents dying or gifts made after December 31, 2017, and before January 1, 2026.

26 Farm-use value refers to the value of real property (land) at its agricultural value rather than, for example, its value for another purpose, such as commercial development.

27 See Poterba and Weisbenner (2000) and Avery et al. (2013).