During this election season, we’ve had a number of questions regarding what the candidates' tax proposals would mean for typical taxpayers, particularly farmers. In this post, I’ll provide a high level summary of several of the key provisions proposed by the two major candidates. Because both tax plans lack key details, it is impossible to assess the actual impacts of the provisions if they were enacted. Rather, this high level overview is designed merely to objectively review several of the key proposals, as they pertain to small businesses and farms.
Clinton’s most recent proposal[i] would lower the estate tax exemption from the current $5.45 million per person to $ 3.5 million per person (the 2009 level). It would also increase from 40% to 45% the rate at which the taxable portion of the estate would be taxed. The plan would appear to retain portability so that a married couple would share a $7 million exemption, as opposed to the current $10.9 million exemption. The estate tax rate would then be progressively increased as the size of the estate climbs.
Portions of estates valued at more than $10 million (per person) would be taxed at a 50% rate, portions over $50 million would be taxed at a 55% rate, and portions over $500 million would be taxed at a 65% rate. In other words, the 65% tax rate would apply only to portions of estates exceeding $1 billion in the case of a married couple.
In his plan, Donald Trump[ii] has proposed eliminating the estate tax entirely.
Impact: Because of current exemption rates, the estate tax has had little impact for some time on the average family farmer. USDA analysis suggests that only 0.8% of farm operators who died in 2015 had estates for which any estate tax was owing.[iii] Of those, only 0.2% of family farms with gross cash farm income below $350,000 were subject to the tax. On average, farm estates that owed federal estate tax had a net worth of $13.5 million and a tax liability of $2.6 million. They paid an average estate tax rate of 19%. IRS has reported that nationwide in 2014 (the most recent date for which this data is available) only 660 taxable estates had any farm property. This included estates for which the farm property was not a way of life. Given these numbers, the elimination of the estate tax would change little in terms of the ultimate estate tax burden imposed on small family farms. It would, however, further limit the need for complex estate tax planning.
The Clinton tax plan would increase the number of family farms that would be subject to some estate tax liability. This would be especially true if proposed regulations targeting valuation discounts are also finalized. Even so, the number of family farms subject to estate tax liability would still remain very low, given that the tax is only imposed on any portion of the estate remaining after subtracting the exclusion amount, expenses, debts, and donations to charity. The tax plan would, however, increase the need for more detailed estate tax planning for more people.
Perhaps more impactful to landowners and their families are both candidates’ proposals to eliminate the step-up in basis at death. Currently, the basis of appreciated assets is reset to fair market value at the death of the owner. This means, for example, that family members can inherit farmland without having to pay any capital gains taxes on the value that has accrued since the decedent originally acquired the property.
Example: If Grandpa purchased 100 acres of farmland for $500 an acre many years ago and dies when the land is worth $8,000, his heirs inherit the property with a basis of $8,000. This means if they turn around and sell the property immediately, they would owe no taxes on the transaction. If, however, Grandpa gave his heirs the property on the day before he died, they would acquire the property with a basis of $500. In that case, if the heirs turn around and sell the property, they would pay capital gain tax rates on $7,500, the difference between the sales price and the basis. Big difference!
Impact: It is impossible to know the exact impact of the projected plans because the details are very sketchy. Both candidates suggest that this change would only impact the wealthiest of taxpayers. Clinton’s plan would treat bequests as a realization event. However, it would “include exemptions to ensure this change only affects the high-income families … and protect middle-class families. And it will contain careful protections and flexibility for small and closely-held businesses, farms and homes, and personal property and family heirlooms.” But, we don’t know the details of those exemptions. It is also important to consider that the proposed elimination in the step-up in basis would be coupled with a lower threshold and higher tax rate for estate tax. In other words, those just over the exemption limits would be hit hard. Some of those would likely be farmland owners and operators.
Trump’s plan purports to eliminate the step-up in basis, but only for estates that exceed $10 million. That exemption amount is presumably for an individual decedent, not for a married couple. However, the plan lacks sufficient detail to know exactly how this exemption would be applied. Furthermore, it appears that the transfer at death would not trigger a realization event, as the Clinton plan would. In other words, it would appear that the capital gains taxes on the built-in gains would not be due at death. Rather, the heir would be liable for the tax only if and when the property were sold.
Speaking of capital gains taxes, the Trump plan would largely leave the current capital gains tax rates in place. Taxpayers would only pay capital gains tax if they earn more than $75,000/year (MFJ). However, the income at which taxpayers are bumped from the 15 percent rate to the highest 20 percent rate would be slashed from $464,851 for MFJ to $225,000. The Trump plan would also eliminate the 3.8% net investment income tax, which is a surcharge (brought to us by the Affordable Care Act) on passive income for high earning taxpayers. Taxpayers who have net investment income and earn more than $250,000 (MFJ) are currently subject to the tax.
The Clinton plan would significantly increase the capital gains rates for high income taxpayers. Those with incomes of $400,000 or more would pay ordinary income rate on the sale of capital assets held for 1-2 years. This rate would then be reduced according to the number of years the asset was held. Assets held for six years or more would be afforded the current 20% rate. However, an additional 4% surtax for incomes > $5,000,000 would also apply, as would the current 3.8% net investment income tax. The Clinton plan states that it would promote a 100% tax exclusion on capital gains for long-term small business investment, although no details are set forth.
Impact: Because assets held for six years or more would continue to be subject to 20% capital gains tax rates, most sales of farmland would still be taxed at a 20% capital gains rate under the Clinton plan. Of course, the 3.8% net investment income tax would still apply, as would the new 4% surcharge if the sale triggers income of $5,000,000 or more. And, as explained in the estate tax section, under the Clinton plan, the death of a landowner would trigger the realization of any capital gains accruing since the decedent acquired the property. It is unclear from the limited detail set forth in the plan how that tax would be imposed or whose tax rate would apply.
The Trump plan would appear to impose the 20 percent tax rate on capital gains where incomes are > $112,500 for single filers and > $225,000 for MFJ. Currently, the 15% rate applies to incomes through $415,050 for single filers and through $466,950 for MFJ. Trump’s proposal would thus appear to increase the number of transactions subject to the 20% capital gains tax rate. No transactions, however, would be subject to the 3.8% net investment income tax or a 4% surcharge.
Tax brackets for individuals who are married filing jointly under current law in 2016 are as follows[iv]:
The Clinton plan would effectively add an additional tax bracket for the wealthiest Americans. Otherwise, it would largely retain current tax brackets[v].
The Trump plan would collapse the current seven tax brackets into three. The new tax bracket would appear as follows[vi]:
Impact:This part of the Clinton plan would appear to have very little impact on family farmers. Very few taxpayers would be impacted by the new highest tax rate. The Trump plan would newly impose a 12% tax on income between 0 & $18,550 for MFJ taxpayers. Currently, such income is not taxed. However, the Trump plan also increases the standard deduction for joint filers to $30,000, from $12,600. The plan also lowers the tax rate from 15% to 12% for income between $18,000 and $75,000. Consequently, it would appear that most MFJ taxpayers earning between $18,000 and $75,000 would pay a bit less income tax under this part of the Trump tax plan.
Although neither candidate has set forth a detailed proposal for business deductions or expenses, Clinton has offered several proposals that would be favorable for small businesses.
The Clinton plan would allow businesses with less than $25 million in gross receipts to use cash accounting. The plan also proposes an apparent doubling of the § 179 deduction for small businesses from $500,000 to $1,000,000. Again, specific details of this proposal are not set forth.
Trump’s online tax plan does not list any specific proposals for immediate expensing of business assets beyond proposing that U.S.-based manufacturers can elect full expensing of plant and equipment.
The Trump plan proposes lowering the business tax rate from 35 percent to 15 percent, and eliminating the corporate alternative minimum tax. The Clinton plan would not change corporate tax rates.
Clinton proposes to “limit” the capital gains deferral made possible through a like-kind exchange. She does not, however, give details regarding the proposed limit. The Trump plan does not address like-kind exchange rules.
CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.