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Tax Relief for Farmers

by Steve Sutter, University of California area farm advisor

The Taxpayer Relief Act of 1997 lowers federal income taxes for most farmers, and allows farm families to transfer farms across generations more easily, according to USDA agricultural economists James Monke and Ron Durst. Most provisions of the new law become effective in 1998.

An estimated 6 percent of farm estates currently owe federal estate and gift taxes compared with just over 1 percent of all estates. The Taxpayer Relief Act gradually increases the unified estate and gift tax credit to shield $1 million from estate taxes by 2006. However, due to the relatively slow phase-in through 2003, most of the benefits will be realized in 2004 and beyond. This and other provisions of the act should reduce, if not eliminate, the need to sell farm assets to pay federal estate taxes, especially for continuing businesses.

Lower capital gains tax rates provide the greatest income tax savings for farmers - nearly $725 million of the estimated $1.6 billion annual savings for the U.S. farming industry. The rate declines from 28 percent to 20 percent for individuals in most tax brackets (from 15 percent to 10 percent for taxpayers in the 15 percent bracket), with lower rates available in the future for assets held at least five years.

Couples can exclude up to $500,000 of the gain on the sale of their principal residence. This new exclusion can be used as frequently as every two years.

The new law also expands retirement savings incentives. Currently, only about 9 percent of farmers annually contribute to an individual retirement account (IRA). Although the 1997 Act creates a new, nondeductible "Roth IRA," deductible IRAs are usually preferred if marginal tax rates are expected to fall substantially in retirement.

Farmers who pay their own health insurance premiums will benefit from expanded self employed health insurance deductions. This year, farmers and other self employed taxpayers are allowed a deduction of 45 percent of health insurance premiums; the percentage deduction gradually increases to 100 percent by tax year 2007 and thereafter.

The act restores farmers' ability to use deferred payment contracts without being subject to the alternative minimum tax (AMT). Deferred payment contracts allow farmers to deliver farm commodities for sale at a specified price, with payment deferred until the following year. The act also repeals the AMT for small corporations (most farm corporations) beginning in 1998.

The act increases tax benefits for most taxpayers for having dependent children by providing a $500 ($400 for 1998) tax credit for each qualifying child under the age of 17. An additional refundable credit is allowed for taxpayers with three or more children. The new child tax credit is expected to benefit about one third of all farmers and their families. To request the free Internal Revenue Service (IRS) Publication 225, "Farmer's Tax Guide," for 1998, call the IRS at (800) 829-3676.