Tax changes may affect farmers, othersPublished 8:00pm Wednesday, March 5, 2014
By GUIDO VAN DER HOEVEN
N.C. State University
Recent tax legislation at both the federal and North Carolina levels may affect farmers and rural landowners.
The American Taxpayer Relief Act of 2012 made “permanent” (meaning did not impose a sunset) several tax provisions which had sunsets imposed. These changes affected income taxes, estate and gift taxes and the alternative minimum tax.
ATRA made permanent the 10 percent income tax bracket and added a new 39.6 percent income tax bracket for high-income taxpayers. For example, the new high-income tax bracket applies to single filing taxpayers when taxable income reaches $400,000, and for a married couple filing a joint return the threshold is $450,000. The estate and gift tax exclusion amounts were to sunset at the end of 2012. The new permanent amount is $5 million per individual, plus an inflation index that provides that in 2014 the exclusion amounts are $5.34 million. Portability of the estate exclusion amount was made permanent too, meaning, that a married couple can preserve $10.68 million of assets with proper planning and execution of the first-to-die spouse’s estate and subsequently the surviving spouse.
For farm business owners, the allowable Section 179 expense election has returned to the prior law amount of $25,000 with a $200,000 investment limit. This is a significant decrease from the 2013 amount of $500,000 with an investment limit of $2 million. Congress may address this issue in future legislation.
The AMT has a permanent patch with an inflation adjustment annually. Reportedly, this removes nearly 30,000,000 persons from being subject to this “parallel” tax system and paying higher income taxes.
A new tax (originates from the Patient Protection and Affordable Care Act, known as Obamacare), effective in 2013 and subsequent years, is levied on taxpayers who have adjusted gross income above $200,000 for singles and $250,000 for married couples. The new tax is the Net Investment Income Tax. The NIIT is a surtax of 3.8 percent on investment returns. Investment return income is: interest, dividends, annuities, royalties, capital gains and rental income to name a few. Retirement income such as pension and IRA distributions is exempt. Sale of timber or land with capital gains may trigger this new surtax.
Many income tax law changes have resulted since the N.C. General Assembly passed and the governor signed the tax legislation into law in July 2013. The tax law changes affect income tax, sales tax and estate tax. Following are highlights of the changes.
Estate tax: The North Carolina estate tax was repealed effective January 1, 2013. North Carolina Gift tax was repealed effective January 1, 2009.
Income tax: The standard deduction amounts were increased, $7,500 for single individuals and $15,000 for married couples.
Personal exemption amounts were repealed.
In 2014, itemized deductions are only allowed for charitable contributions and mortgage interest and property tax paid. The mortgage interest and property tax allowable deduction is capped at $20,000.
The income tax rate is a flat 5.8 percent in 2014, dropping to 5.75 percent in 2015 and subsequent years.
North Carolina, for 2013, does not conform to the $500,000 Section 179 expense election amount allowed on the federal return. The expense election is limited to $25,000 with a $125,000 investment limit. An adjustment must be made to add back to North Carolina income the disallowed amount to arrive at North Carolina taxable income.
North Carolina does not conform to federal law and allow the domestic production activities deduction; if taken federally, it is added back to North Carolina income.
Farm-related income tax credits for North Carolina were repealed as of Jan. 1. For example: conservation tillage credit, credit for property tax paid on farm equipment, gleaning crops credit, poultry composting facility credit to name a few.
Sales tax: In most cases if there is any “value added” done to a product (selling cuts of meat), the seller must collect and remit sales tax.
Farmers, in order to purchase farm inputs sales tax exempt, must have $10,000 of gross farm income from the preceding year in order to qualify for the exemption. This may affect operators of small farms. This is not to be confused with the $1,000 of agricultural product produced as an average, over three years, for property tax purposes to qualify for present use value program.