Smith, Burnett & Hagerman, LLC

Don't Tax Me! Tax The Other Guy ...

     As we know, start-up farming is difficult these days.  After the Revolutionary War, the soldiers who mustered out of the service were given land warrants for services rendered.  Public lands were used as pension grants. The old veterans got their land warrant which they sold for cash (providing the vets with a modest one-time pension).  Bankers bought the warrants and sold them with interest to young farmer-settlers in western states and territories. Young farmers got land to begin their farming life, and bankers made money.  Everyone got something.  That was "startup farming" in the latter part of 18th Century America.

     The Obama Administration, in the 2015 State of the Union message, hinted at the opposite sort of change.  The Obama folks with changes in the capital gains tax system for estates would make inheriting the farm even more difficult and costly. 

     When someone dies and wills the heirs property, those inheriting anything but cash property, especially real estate or stocks and bonds, get a "stepped up" capital gains tax basis.  The Obama proposal would have done away with the stepped-up basis.   

     Thankfully wiser heads prevailed and after the 2016 election, the ideas was scrapped.

     The Difference Between Estate Taxes and Capital Gains Taxes.  The estate tax rate on property that is not exempt from the estate tax is 40%.  That's a nasty bite out of an inheritance.  Heirs indirectly pay the tax because it is money that the heirs never see -- the estate itself pays the tax on a 706 form, and usually pays it within nine months of the date of death and before distribution of what's left. 

     That's the bad news.  The good news, if there is any, is the government does not tax a certain level of estate tax proceeds.  Currently, the exemption is $11.5 million in 2020.  If the decedent's total value of all property being probated (or a trust being administered) is less than the exemption, or if the decedent is married and all the property is passed to the surviving spouse, there is no estate tax at all when the first spouse dies.  With a concept called "portability," the second spouse to die can shelter nearly $23 million from an estate tax.  Few American estates exceed $23 million. 

     There may be some estate or trust income taxes if there is income producing property, but at least there is no estate tax on the smaller estates.