Federal Tax Policies and Farm Households

Significant changes in Federal individual income and estate tax policies have occurred over the last 10 years. Analysis suggests that changes in Federal tax provisions affecting both individual and business income taxes have reduced average tax rates for all farm households, resulting in the lowest tax burden on farm income and investment in a decade. Similarly, an analysis of the changes to Federal estate tax policies suggests that increases in the value of property that can be transferred to the next generation free of the estate tax, combined with special provisions for farmers and other small businesses, have greatly reduced the number of farm estates subject to the tax and the amount owed. While nearly 10 percent of commercial farm estates could owe tax in 2009, only 1 to 2 percent of all farm estates are estimated to be subject to the Federal estate tax this year.income tax, estate tax, tax rates, estate, Federal tax policy, farm losses, commercial farms, Farm Management,

FEDERAL TAX POLICY AND FARMERS: A CURRENT PERSPECTIVE AND OUTLOOK

Agricultural Finance,

Effects of Reducing the Income Cap on Eligibility for Farm Program Payments

The current $2.5-million income cap on eligibility for farm program payments affects only a small number of farm program payment recipients each year. A reduction in the cap to$200,000 would affect a larger number of farm households but still only a small share of recipients. Based on IRS tax data for 2004, about 1.2 percent of all farm sole proprietors and about 2 percent of crop share landlords would be potentially subject to the proposed lower adjusted gross income (AGI) cap. ARMS survey data suggest a similar share of farm sole proprietors (1.1 percent) could be affected. When partnerships and farm corporations are included, about 1.5 percent of all farm operator households could be affected because a larger share of farm partnerships (2.5 percent) and farm corporations (9.7 percent) could be subject to the proposed cap. ARMS data indicate that $807 million in payments were received in 2004 by farm operators organized as proprietors, partnerships, and corporations with incomes exceeding$200,000. However, not all of these payments would be affected by a $200,000 income cap on eligibility for payments due to differences in IRS and ARMS data and changes by producers in how they manage their incomes and expenses. The study also found that farm income averaged$271,749 and net worth averaged over $1.86 million for farm households with AGI estimated to be over$200,000 based on the ARMS data.farm program payments, adjusted gross income, farm typology, tax data, AGI cap, farm households, Agricultural Resource Management Survey, Farm Management,

Whole-Farm Approaches to a Safety Net

In recent farm policy debates, proposals for a whole-farm revenue safety net program have been put forward that could provide a farm-income safety net for a wide variety of farming activities. These proposals include income- stabilization accounts and whole-farm revenue insurance. Risk protection from income-stabilization accounts would depend on the reserves in individual accounts and the structure of program benefits. Experience with farm savings accounts in Canada and Australia suggests that lack of adequate account balances and buildup of balances beyond the level required for risk management can reduce program effectiveness. Whole-farm revenue insurance could overcome these problems since coverage would not depend on the farmer's ability to build an account balance and benefits would only be realized when the farmer suffers a drop in income. However, the complexity of factors affecting income variability raises questions about the feasibility of a whole-farm insurance plan.Agricultural and Food Policy, Risk and Uncertainty,

The Taxpayer Relief Act of 1997: Provisions for Farmers and Rural Communities

Under the Taxpayer Relief Act of 1997, most farmers will pay less Federal income tax, and farm families will find it easier to transfer the family farm across generations. The new law--the tax portion of 1997 legislation to balance the Federal budget by 2002--emerges from years of debate on proposals for tax simplification, broad tax reduction, and targeted relief for capital gains and estate taxes. The legislation is expected to generate a net tax reduction of $95 billion over 5 years for all taxpayers. A number of general and targeted tax relief provisions will reduce Federal taxes significantly for farmers and other rural residents, but also will increase the complexity of both Federal income and estate taxes. Farmers are expected to save more than$1.6 billion per year in Federal income taxes and $150-200 million in Federal estate taxes.farm taxation, Federal income tax, family farm, capital gains, estate taxes, tax reform, tax policy, agricultural assets, farm income variability, Agricultural Finance, Public Economics,

WILL SAVINGS ACCOUNTS (EVER) BECOME PART OF U.S. FARM POLICY?

Various forms of farmer savings accounts have been proposed to help U.S. farmers manage their income variability. Financial incentives include tax-deferral and government matching deposits. This paper estimates farmer eligibility, program size, and benefit distributions for two congressional proposals: FARRM accounts and a farm counter-cyclical savings account program.Agricultural and Food Policy, Agricultural Finance,

EFFECTS OF FEDERAL TAX POLICY ON AGRICULTURE

This report analyzes the effects of the current Federal tax code on farming and evaluates tax proposals to assist beginning farmers. Investment, management, and production decisions in agriculture continue to be influenced by Federal tax laws. Farmers continue to benefit from both Federal income and estate tax policies targeted to agriculture. These provisions exert upward pressure on farmland values and help support ongoing trends that increase the number of very small and large farms. However, the influence of the current tax structure with lower marginal tax rates and a broader income base is less than in earlier decades and may be small relative to government farm programs. Tax proposals to assist beginning farmers would likely increase the availability of land for lease or purchase, but would do little to make land more affordable.Federal tax policy, income tax, social security tax, structure, small farms, estate and gift tax, capital gains, farm losses, Agricultural Finance, Public Economics,

The Effect of the Housing Boom on Farm Land Values via Tax-Deferred Exchanges

This project examines Section 1031 of the Internal Revenue Code and agriculture land exchanges. Stakeholders in rural communities and agriculture are particularly interested in Section 1031 because the recent growth in transaction values of farmland may have, in part, been stimulated by Section 1031 land exchanges. Further, although many have speculated that such exchanges are widely used, little empirical research exists about the provision. We examine the theory of exchanges and develop a theoretical premium value for exchanges. We also present the first evidence of like-kind exchanges involving farmland using Federal tax data.Like-Kind Exchange, Capital Gains Tax, Agricultural Land, Land Economics/Use, Public Economics, Q15, H24,

FARM MACHINERY INVESTMENT AND THE TAX REFORM ACT OF 1986

The Tax Reform Act of 1986 significantly changed incentives for investing. This analysis specifically examines how changes in marginal tax rates, depreciation schedules, and the investment tax credit altered the cost of capital and net investment in agriculture. A stochastic coefficients econometric methodology is used to estimate an investment function which is then used to simulate the effects of tax reform. Estimates indicated that relative to prior law, the Tax Reform Act will reduce the capital stock of farm machinery and equipment by nearly $4 billion.Agricultural Finance, Farm Management,

Structural and Financial Characteristics of U.S. Farms: 2001 Family Farm Report

Family farms vary widely in size and other characteristics, ranging from very small retirement and residential farms to establishments with sales in the millions of dollars. The farm typology developed by the Economic Research Service (ERS) categorizes farms into groups based primarily on occupation of the operator and sales class of the farm. The typology groups reflect operators' expectations from farming, position in the life cycle, and dependence on agriculture. The groups differ in their importance to the farm sector, product specialization, program participation, and dependence on farm income. These (and other) differences are discussed in this report.Agricultural Resource Management Study (ARMS), family farms, farm businesses, farm financial situation, farm operator household income, farm operators, farm structure, farm typology, female farm operators, government payments, spouses of farm operators, taxes, Agricultural Finance, Farm Management,