September Clinic Dates

Free clinics are available through the Farm Mediation program and Legal Aid of Nebraska.   In these clinics, participants can get one-on-one advice from financial and legal professionals about farm transition and financial issues.  The dates for September 2016 are:

Grand Island – Thursday, Sept. 1st

Fairbury – Friday, Sept. 9th

North Platte – Thursday, Sept. 8th

Norfolk – Friday, Sept. 16th

Lexington – Thursday, Sept. 15th

Norfolk – Tuesday, Sept. 27th

Please call the Rural Response Hotline 1-800-464-0258.

Crowdfunding and Taxes

As today is tax day, it seems somewhat appropriate to discuss taxes.  But I want to discuss a little-known tax issue that may become a big issue, either currently or in the future, for some of our readers.

Crowdfunding is a growing funding resource for many farmers and ranchers just starting out.  Crowdfunding is when a person or organization makes a pitch for funding on an Internet platform such as Kickstarter, Barnraiser, or many others (see a comprehensive list here).  The general idea is to have a lot of small donations from your “crowd” to fund a project.

But is there a potential downside?  Yes, from a tax perspective there could be.  According to this New York Times article, IRS rules require companies that process payments for crowdfunding sites to send a 1099-K form to any customer for whom they register 200 annual transactions totaling at least $20,000.

As the Times points out, this a tax issue that could be compounded by timing.  If the crowdfunding occurs in a year with little to no business expenses to offset the generated income, there could be a greater than anticipated tax bill due.

But there is also the state tax angle, more specifically, sales tax.  Sales tax varies state-to-state and, in some cases, situation to situation.  Generally speaking, however, sales tax is due for anything sold to an in-state buyer.  Sales tax is applicable regardless of the number of donors or amount raised.

In sum?  Crowdfunding may be a wonderful opportunity for your farm.  But be aware of the potential tax implications before jumping straight into a fundraiser.

Charitable Giving in Succession Planning

We recently posted a series of articles on estate and succession planning.  We are going to highlight a few throughout the next few months through blog posts and today, we start with charitable giving.

Charitable giving is a portion of many estate plans, for many reasons.  For some, the sole purpose is charitable while for others, there may be both a charitable purposes and advantageous tax treatment.

For estate planning purposes, any amount given to a qualified charity is deductible.  Thus, a person with a $10 million estate could transfer $5.43 million to his or her heirs and the remainder to charity, thus avoiding the payment of estate taxes.  The charitable deduction for estate tax purposes is unlimited.

The charitable deduction for income tax purposes, however, is not unlimited.  Various rules apply and it is best to consult with your accountant to explore the scenarios.  This blog post is merely to discuss some of the legal rules and encourage you to read the entire charitable giving article!

Generally, (and again, speak with your accountant), the limitations depend upon: (1) whether the giving is to a public or private charity, (2) the type of property being given, and (3) whether or not the donor is an individual or corporation.  Again, generally, an individual may take a charitable deduction for income tax purposes of up to 50% of the donor’s adjusted gross income.

To determine if your selected charity is an eligible recipient, the IRS maintains a list.  There are some other requirements, found in Section 2055 of the Internal Revenue Code, but generally, if your charitable contribution is to a political entity (e.g. United States, a state, political subdivision), non-profit (including fraternal societies, orders, and lodge system), or veterans’ organization incorporated by Act of Congress, the charitable gift is to an eligible entity.

Charitable gifts may be outright, such as a contribution to an alumni fund or the collection plate at church, or a partial interest in property, such as retaining a life estate in donated agricultural land.  If you wish to retain a partial interest in the property, you will need to explore more sophisticated planning options such as charitable lead trusts, charitable remainder trusts, gift annuities, and in certain instances for farm land and residences, a life estate.

We encourage you to read the Charitable Giving article and contact us if you have any questions!

 

Nebraska Sales and Use Tax Exemption for Agricultural Repair and Replacement Parts

As the crop season gets underway, now is a good time to remind everyone of that the Nebraska, effective October 1, 2014, exempts sales and use tax when purchasing agricultural repair and/or replacement parts.

Per the Nebraska Department of Revenue’s Sales Tax Exemption Chart, (and based upon this Department of Revenue regulation) any repair or replacement parts for agricultural machinery and equipment used in commercial agriculture is exempt from sales and use tax.  Form 13 is required when using the exemption; specifically, you must fill out Section B of Form 13 and indicate that the exemption is for commercial agriculture.

The exemption for repair and replacement parts is separate from the Nebraska Personal Property Tax Exemption for beginning farmers.  The Personal Property Tax Exemption requires an application to the Nebraska Department of Agriculture, as well as supporting documentation.  The exemption for repair and replacement parts does not require such steps.

If you have any questions, please feel free to contact us!  We’re always here to help.

2015 Unified Credit and Annual Gift Tax Limits Raised

The IRS recently released the 2015 tax year exclusion amounts for the unified credit (or basic exclusion) and the annual gift tax exclusion.

For the 2015 tax year, the unified credit exclusion is $5.43 million per taxpayer.  The annual gift tax exclusion remains at $14,000.

The unified credit is the combination of the lifetime gift tax exclusion and estate tax exclusion.  If your lifetime gifts and taxable estate exceed $5.43 million in 2015, you will then owe up to 40% tax to the federal government.

A good overview of the implications of the unified credit and annual gift tax exclusion is here.

Portability Deadline Upcoming

As you may or may not know, the IRS is permitting tax filers to elect portability for the estate of taxpayers who passed away in the previous three years (or 2011, 2012, and 2013).  Typically, a portability election would only be available with a properly and timely filed federal estate tax return.

The deadline to make the portability election is December 31, 2014.

As a quick reminder, portability allows a surviving spouse to elect to use any unused portion of the deceased spouse’s estate tax exemption.  As a result, a married couple may exempt upwards of $10 million in assets regardless of which spouse passes first.

Updates on federal estate and gift tax issues

This post is long overdue but, as we know, there has been a lot of activity in the past few months for farmers and ranchers.  But now that we have a Farm Bill, it is time to look at what 2014 holds for federal estate and gift tax issues.

First, the annual gift tax exclusion:

We’ve previously discussed the annual gift tax exclusion.  For 2014, the annual gift tax exclusion remains $14,000.  What this means is that an individual can gift up to $14,000 per year to as many individuals as you’d like without tax implications.    In other words, you can gift up to $14,000 per year to each of your children, each of your grandchildren, or any other individual you’d like.

Second, the unified credit:

There is another gift tax issue beside the annual gift tax exclusion — for gifts over $14,000 to an individual in a year.  This is the estate and gift tax, or more commonly known as the unified credit.  For 2014, the estate and gift tax exclusion is $5.34 million.

But what does that mean?  It means an individual can gift up to $5.34 million dollars before any gift tax will be assessed.  It also means an individual can transfer $5.34 million at death before any estate tax will be assessed.  It also means that the gift tax and estate tax are unified, meaning an individual can only gift or transfer $5.34 million before the tax is assessed.  In other words, an individual can gift $2 million and transfer $3.34 million and no tax will be assessed.  Alternatively, if an individual gifts $3 million and transfers $3.34 million, tax will be assessed on $1 million ($3 million + $3.34 million – $5.34 million = $1 million).

Even if your assets and/or net worth does not approach $5.34 million (or $10.68 million if married), estate planning is well worth your time.  You will still want to consider who will inherit your assets, how you want those assets inherited (e.g. will, trust, shares of a business), and, if you have minor children, guardianship.  You will also want to consider the costs of probate versus the costs of trusts, powers of attorney and health care, and end-of-life care.

Estate planning is for everyone, not just those who may have assets that go above the federal estate and gift tax exemption of $5.34 million.  It is worth the time to consider what you need and want and then take the necessary steps to ensure those needs and wants can and will occur.

Some basics about the federal estate and gift tax

As discussed previously, the 2014 unified credit for federal estate and gift tax has been raised to $5.34 million per person.  But what does that all mean?

The unified credit is the term given to the total amount a person may exclude from federal estate and gift tax.  In other words, a person may transfer assets during their lifetime (i.e. gifts) or after (i.e. estates).  The amount a person may transfer via only gifts, only estates, or a combination of the two is the unified credit.  It is only when the credit is exceeded that federal estate and gift tax is owed.  In other words, if the combination of your gifts and estate totals $6.34 million, federal estate and gift tax will be owed on $1 million ($6.34 million minus $5.34 million 2014 unified credit).

Portability remains a possibility with spouses.  Remember that portability requires the estate of the deceased spouse to file an estate tax return, even if no tax is owed.  The estate tax return is due nine months after the death, with a six month extension permitted.

Also remember that the annual gift tax exclusion is different than the unified credit.  You can gift up to $14,000 per person without encroaching upon the unified credit.

A good article that goes over the above and a few other details is here.  If you are a Nebraska or South Dakota farmer or rancher considering business transition, feel free to contact us with any questions you may have about the federal estate and gift tax.

2014 Tax Exclusions, Exemptions Limits Released

The IRS has released the 2014 tax exclusions, exemptions, and other information.  Of interest to this audience:

  • The unified credit (estate and gift tax, or basic exclusion) is $5.34 million in 2014.  Portability remains and the spouses can transfer up to $10.68 million tax free.
  • For an estate of a decedent dying in 2014, if special use valuation under section 2032A is used, the aggregate decrease in the value of the qualified property resulting from the use of section 2032A cannot exceed $1.09 million.
  • The annual gift tax exclusion remains $14,000 in 2014.
  • The loan limit for agricultural bonds for first-time farmers (“aggie bonds”) is $509,600.

Also included in the IRS notification are the 2014 tax brackets.  You may find this information useful as you begin tax planning for 2014.  (The information is on pages 5 – 7 of the notification.)

What does it all mean?  It means that there were no substantive changes to estate and gift tax in 2014 (as of this writing) and aggie bonds are available to first-time farmers.  Later this week we’ll go into further detail about estate and gift tax issues but for now, know that an individual will not pay federal estate taxes for a taxable estate under $5.34 million (or, if married, under $10.68 million).

In the meantime, should you have any questions, you are welcome to contact us!

Portability of the estate tax exclusion amount

Due to the passage of the American Taxpayer Relief Act of 2012 (ATRA), taxpayers saw the portability election made permanent.  What exactly does this mean for the average Nebraska and South Dakota farmer or rancher?

First, we have to discuss what portability election is.  As you likely know, in 2013, every taxpayer has a unified credit of $5.25 million.  This means a taxpayer can pass at death or gift throughout his or her lifetime $5.25 million prior to the imposition of the estate and gift tax.  But what if a person does not use the entire $5.25 million?  In other words, what if the total assets of a person total $3.25 million?

Assuming you are married (sorry … this won’t work if you are unmarried), you have the option of making a portability election.  A portability election is a mechanism for spouses to ensure full use of each of their exemptions, totaling $10.5 million in 2013.  Portability allows a surviving spouse to use the deceased spouse’s unused exclusion amount for estate and gift taxes.

An example is the best way to understand the math of the portability election.  Assuming no other estate planning, the taxable estate of the deceased spouse is $3.25 million.  Most of that amount is due to the value of farmland.  The deceased spouse’s unused exclusion amount is $2 million.  The surviving spouse can then elect to “port” the $2 million unused exclusion amount, thus raising the surviving spouse’s exclusion amount to $7.25 million.

The election to port, however, must be done on an estate tax return for the deceased spouse.  This means an estate tax return must be filed even when no estate tax is due.  If you are filing an estate tax return solely for the purposes of a portability election, a good faith estimate of asset value is required.  The estate tax return is due nine months after the deceased spouse’s death, before any extensions for filing are requested (an extension is typically six months).

Why is knowledge of the portability election important?  Portability can function as a default estate planning tool to ensure the maximum exclusion amount between spouses is used.  No prior planning is required, unlike with a trust, will, or business entity.  It does require, however, the timely filing of an estate tax return after the deceased spouse’s death.

The portability election can be especially important as land values continue to rise.  The ability to transfer the deceased spouse’s unused exclusion amount to the surviving spouse may allow farm and ranch land to be transferred without imposition of the estate and gift tax.  As many farmers and ranchers know, land values are rising faster than the rate of inflation.  There may be a legitimate concern that the estate tax exemption, which is indexed to the rate of inflation, may not be able to keep up with land valuations.  Thus, while the taxable estate of the deceased spouse may not reach the estate tax exemption (in 2013, $5.25 million), the taxable estate of the surviving spouse may exceed the estate tax exemption because the rate of inflation is lower than rising land values.  Portability is a means to capture the deceased spouse’s unused exclusion amount, which may provide enough of a cushion to ensure the estate tax is not paid due to the combining of the surviving spouse’s exclusion amount and deceased spouse’s unused exclusion amount.

Other things to keep in mind: the portability election is for the deceased spouse’s unused exclusion amount.  If the surviving spouse remarries and does not use the deceased spouse’s unused exclusion amount and the second spouse passes, the surviving spouse no longer can use the unused exclusion from his or her first spouse.  Additionally, while it is likely that the portability election will remain in the tax code permanently, that can all change in an instant with new legislation.  Finally, there is no method to retroactively elect to port the unused exclusion amount — the election must be done in the nine months (or after any extensions have been been granted) after the deceased spouse’s death.

Portability may be an option or other “traditional” estate planning techniques such as trusts may be required.  Do you want to discuss the possibilities?  You are welcome to contact us for a one-on-one mentoring session, attend a workshop or attend a clinic.