Weighing the impact of the federal tax relief legislation on agriculture
Much has been said about the federal tax relief legislation and what it really means for farmers. Although the final version of the Tax Cuts and Jobs Act hasn't yet been signed into law, the framework of the tax relief legislation is clear enough to provide guidance for farmers to plan ahead.
As an initial matter, the final legislation does provide across-the-board rate reduction for individuals and families.
Presently there are seven income tax brackets. That doesn't change with the Act, but the rates in five of those brackets are reduced. The top rate is reduced from 39.6 percent to 37 percent. Most other brackets are reduced about 2 percentage points. These reductions are scheduled to phase out in 2026, at which point they return to present levels.
In a press release, Senator John Hoeven, R-N.D., said this about the Act: "We worked hard to ensure that the tax relief bill works for North Dakota," said Hoeven. "This legislation lowers rates across the board for individuals and families, enabling hard-working Americans to keep more of their paycheck. At the same time, it lowers rates and provides relief for small businesses, including our farmers and ranchers. This will enable us to grow our economy and create more jobs with higher wages."
Per that press release, Hoeven highlighted important provisions in the final tax plan. The package provides a net tax cut of more than $2,059 for a median income family of four. Additionally, it increases the standard deduction, which means that Americans will not be taxed on the first $12,000 of income for individuals, $24,000 for married couples and $18,000 for a single parent with dependents.
Furthermore, under this bill, purportedly 9 out of 10 taxpayers will likely use the expanded standard deduction. Taxpayers will also benefit from a doubling of the Child Tax Credit to $2,000 per child.
Business owners and farmers will now be allowed full expensing or writing off the cost of new investments, which is phased down over an additional four-year period. There is an expansion of Section 179 expensing of equipment on a permanent basis, as well.
Controversially, the act doubles the estate tax exemption. This is beneficial to farmers who may own enough in capital assets, including land, to need assistance avoiding the punitive estate tax. However, the "free step up" in basis remains, which permits capital assets to pass from one generation to another without being taxed. For the most part, interest paid on borrowed money will remain tax deductible, as will property taxes.
The act repeals the Obamacare/ACA tax on those without health insurance. Depending upon your political tilt, this is going to either save taxpayers money or it's going to make America unhealthy. Time will tell on that front.
The act is a legislative victory for farmers, most of whom file their taxes as small business owners, and who desire a chance to give less of their bottom line to the federal government.
The corporate income tax rate falls from 35 percent to 21 percent, which is the lowest corporate rate in nearly 80 years. The goal of this reduction is to stimulate stability and growth in the business sector. Opponents argue that most corporations already pay at below the 21 percent rate.
According to an article on www.thebalance.com, the final version of the act increases the deficit by almost $448 billion over the next 10 years. The tax cuts themselves would cost $1.47 billion. But that's offset by $700 billion in growth and savings from eliminating the ACA mandate. The Tax Foundation said the plan would boost GDP by 1.7 percent a year. It would create 339,000 jobs and add 1.5 percent to wages.
The U.S. Treasury reported that the bill would bring in $1.8 trillion in new revenue. It projected economic growth of 2.9 percent a year on average. The CBO estimates just 1.9 percent growth.