Farmers affected by present estate tax regulations
A reader's response to an editorial from the American Farm Bureau Federation on the estate tax and cash positions of farmers.
Many farm commentators have intentionally mislead farmers and ranchers on the effects of the present federal estate tax in order to stimulate support for its elimination as proposed by the Trump administration and the wealthiest in our society.
The estate tax in 2017 only is applicable for gross assets (at present market value at the time of the estate) greater than $5.49 million of the estate of one individual and $10.98 million inclusive of the individual’s spouse. Further, In the case of a qualifying family farm, (IRC 2032A) allows an inflation-adjusted reduction from value of up to $1,120,000 in 2017 as part of the exclusion for family farms, and $1,140,000 in 2018. Thus, an estate of a farm in 2017 would be exempt from any estate tax up to $12.1 million for a married farmer.
How many farm estates actually pay an estate tax?
According to IRS data, in 2016 only 12,411 estate tax returns were filed for all estates, inclusive of farm and other. Of those, 5,219 taxpayers actually paid an estate tax. Of the 5,219, there were only 682 farms nationally and they paid estate taxes on $2.77 billion farm assets, which average $4.1 million in taxable assets per farm. The estate tax for all estate tax filers paid an actual rate of 16.97% on the total estate, not the 40% that general regulations note for the taxable assets only.
The Tax Policy Center forecasts that in 2017, of the 2.7 million estates, only 5,500 (0.2 percent) will owe any tax. Of those 5,500, only 80, or 1.5 percent, would be classified as small farms or businesses.
Based on survey data of dairy farms in northeast Wisconsin, in 2016 roughly less than six percent of dairy farms may have some estate tax liability and they would average about $4.3 million in taxable assets over the $10.98 million without the family farm exclusion amount. With more than two households owning these farms, though, there is a strong probability that no estate taxes might be owed. That means that more than 94 percent of dairy farmers would face no estate tax liability. We can probably extrapolate that this holds more or less similarly for other types of Wisconsin farms and possibly nationally.
Anyone owning more than $10.9 million in estate assets is absolutely wealthy. We farmers should not deceive ourselves. Of the aforenoted dairy farms, average net worth (total assets minus debt) of farm assets exceeded $8 million in 2016. This easily puts these farmers’ wealth in the top five percent of US households.
While average US household wealth in 2016 amounted to about $717,000 ($90.2 trillion/125.8 million households), the net worth of the top five percent of US households held 65 percent of all US household wealth, but the bottom 95 percent owned only 35 percent. (See GW Domhoff, “”Wealth, Income, and Power,” U. of California.)
So why should the top one percent not pay an estate tax? No capital gains tax is applied on estate assets, but retirees living on fixed income and savings must continue to pay capital gains tax on that income. These assets, not unlike those of farmers, took several generations to accumulate.
Without the estate tax, which has absolutely no effect on more than 94 percent of farmers, maldistribution of income will accelerate such that the top five percent get astronomical gains in wealth and income while the remainder is left holding the bag. Data from the US Census Bureau and the IRS clearly demonstrate this over the past 40 years.
If estate taxes are eliminated, increasing concentration in farmland will continue and more of our fellow farmers or their descendants will be pushed out. As of now, the estate-tax elimination will deprive the US Treasury of more than $183 billion in revenue over the next 10 years. The rest of us will have to make up for that shortfall.
W. Michael Slattery