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New farm tax provisions PDF Print E-mail
Thursday, January 17, 2013 1:55 PM

Assistant Professor OSU Extension
Putnam County

The following article is a summary of farm tax changes in the Taxpayer Relief Bill written by David Marrison and Chris Bruynis, OSU Extension educators.

The Taxpayer Relief bill permanently retains the 10-percent, 15-percent, 25-percent, 28-percent and 33-percent income tax brackets. The 35-percent tax bracket ends at $400,000 for single filers and $450,000 married filing jointly. Above this threshold, there’s a new 39.6-percent tax bracket. Likewise, the bill permanently retains the 0-percent and 15-percent tax rates on qualified dividends and long-term capital gains, and adds a new 20-percent tax rate that would apply to taxpayers who fall within the new 39.6-percent tax bracket. The new capital gains tax rates for 2013 and future years will be:
— 0 percent applies to capital gains income if a person is in the 10-percent and 15-percent tax brackets;
— 15 percent applies to capital gains income if a person is in the 25-percent, 28-percent, 33-percent, or 35-percent brackets; and
— 20 percent applies to capital gain income if a person is in the 39.6 percent bracket.

For the Federal Estate Tax, this legislation permanently maintains the federal exemption for gifts and estates at $5 million instead of dropping to $1 million. This amount will also be indexed for inflation and includes the transfer of the unused exemption of a deceased spouse to the surviving spouse. It should be noted that this legislation included the word “permanent.” This is significant as many fiscal agreements made by Congress since 2001 have contained a phase out date. The top rate to tax amounts in excess has increased from 35 percent to 40 percent. But for many this was an acceptable compromise since it was scheduled to drop to $1 million with the excess taxed at 55 percent in 2013. This portion of the legislation should allow many farm families to sleep easier as they make plans to transition their businesses to future generations.

Internal Revenue Code Section 179 allows farms and other businesses to write off small amounts of annual investments in capital assets, such as machinery, in the year of purchase in lieu of depreciating the investment over a number of years. The 179 deduction was reverted (increased) back to the old 2010/2011 level of $500,000 for 2012 and 2013. This is a huge incentive given that up until this legislation was passed, the 2012 limit was $139,000 and it would have dropped to $25,000 in 2013. It should be noted that this deduction will revert back to $25,000 beginning in 2014.

This legislation also extended the 50-percent special depreciation allowance, also known as bonus depreciation, through the end of 2013. This provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. Bonus depreciation is now scheduled to be eliminated for the 2014 tax year.

In 2011, Congress had lowered the FICA payroll tax rate from 6.2 percent to 4.2 percent to put more money in the pockets of Americans. This adjustment expired at the end of 2012. This will result in a payroll tax increase for workers. For example, a farm employee earning $30,000 a year will take home $50 less per month. Congress also allowed the special break for conservation easement donations to be extended through 2013.

As part of the plan for funding the federal health care, several new taxes were put into place. These included a tax on investment income and an additional Medicare tax for those people earning higher incomes. Both of these impact individuals making more than $200,000 a year or couples with $250,000 or more. These taxpayers must pay the new 3.8-percent tax levied on investment income such as cash rent received for farmland starting in 2013. Additionally, these same high-earners must pay an additional 0.9-percent Medicare payroll tax on wages above $200,000 for individuals and $250,000 for couples. This increases the current 2.9-percent Medicare payroll tax to 3.8 percent for those dollars earned above the designated earning levels.

The complete American Taxpayer Relief Act of 2012 can be accessed at: http://www.govtrack.us/congress/bills/112/hr8/text

 

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