Social Security Change for Farmers
Social Security has long been a tricky area for farmers. In the past, farmers who showed a loss, or had low profits, could decide to voluntarily pay more SECA tax to earn benefit coverage.
For 2008, however, a new law allows farmers to get a full four quarters of coverage if gross income from farming is just $6,300. Note that is gross, not net, income. In the past, the most these taxpayers could hope for was one quarter if they paid more to earn the benefit coverage.
Maximize 2008 Tax Breaks
Time will run out soon on a number of tax breaks that were part of the Economic Stimulus Act of 2008. Before year's end, make sure you're current on:
- Bonus depreciation rules. Half—that's 50%—of the cost of new assets for the business (put into service this year) can be written off in 2008. The remaining 50% falls under normal rules for depreciation.
- Write-offs for business vehicles. We mentioned this in an earlier issue, but it bears repeating. Write-offs for company vehicles are very high right now. For example, if you have a new SUV with a loaded weight over 6,000 pounds, $25,000 of the cost can be expensed the first year.
Pros and Cons of Land Gifts
Most retirees recognize the benefits of holding farmland through retirement years. But often Mom and Dad—feeling financially secure—wonder, "Why not start giving some of that land to the kids now?"
The gift tax barrier. The first barrier is navigating the federal gift tax system. We all know about the $12,000-annual per-donee gift exclusion, but a gift of 2 or 3 acres per year is a non-starter!
Rather, it's each donor's lifetime million-dollar exemption that counts. So Mom and Dad each can move up to $1 million of farmland with no gift tax, although any amount of this exemption used during one's lifetime reduces that person's subsequent estate exemption.
With that estate exemption scheduled to jump to $3.5 million per person in 2009, using up to $1 million in lifetime transfers is workable for many. And if you expect the land to continue to inflate, moving it out at today's values can be a winning decision.
Carryover basis. If the gift tax is no problem, what about income taxes? The sad reality is lifetime gifts come with a carryover tax cost to the donee.
That has real significance when compared to a post-death transfer. When an asset passes through an estate, it receives a step-up in tax cost to the fair market value as of the date of death.
Effectively, all of the built-in capital gain that has accumulated over the last 50 years disappears in a post-death transfer. This distinction is huge if the land is subsequently going to be sold by the kids (and meaningless if they hold it through their estates).
Installment sales. Another trap for the unwary lies in the installment sale rules. Let's say that 80-year-old Dad decides it's time to sell a parcel of farmland to Junior and does so on a 20-year installment note.
It's bad news if Dad passes away before that 20-year note is fully paid. Installment notes do not receive a step-up in basis when passing through an estate. So when the heirs continue to collect on that note from Junior, they face capital gain taxes on each payment, just as Dad did.
And there is an even bigger blow-up if Dad bequests that note receivable to Junior. For example, if Dad dies halfway through that contract with 10 more payments due and his will directs that the note is extinguished, the remaining gain on that land sale is accelerated into the final income tax return of Dad's estate! That tax is borne by all of Dad's heirs, not just Junior, who received the economic benefit of that bequest.
By Andy Biebl