Sodbuster - Farmers Gain Tax Breaks

FARMERS GAIN TAX

BREAKS IN

BUDGET DEAL

© 1997 Joe Murray

Washington - The budget and tax deal offers many provisions of benefit to farmers and small business. House Majority Leader, Dick Armey, praised the deal, "This agreement gives significant relief to hard-working families and at the same time will lead to the first balanced budget this country has seen in a generation." President Clinton echoed Armey’s praise in his weekly radio address to the nation, "This is an historic achievement - a plan that will strengthen our economy and prepare our people for the challenges of the 21^st century. There has been a lot of cheering in Washington, but there has been cheering on Main Street as well. For the real impact of this budget will be in the lives, the dreams, and the futures of families all across America."

The tax relief bill increases the estate tax exemption from $600,000 to $1 million by 2007. For farmers and small businesses, there is immediate help. There is a special $700,000 per person exclusion for farmers and small business that takes place immediately. Thus, farmers and small business people will not pay federal inheritance tax on the first $1.3 million. Kansas senator and member of the Agriculture Committee, Pat Roberts, said, "The estate tax reforms answer the needs of families in every community and every family farm. Today’s agreement realizes a goal that I’ve worked for years to achieve. In many cases, it will enable sons and daughters to continue their parents’ dream of owning a small business or farm. That’s what has been at the heart of this debate."

Farmers got another tax benefit that many farm state legislators have been pushing for many years. For the 1998 and 1999 crop years, farmers get to average their income over three years to eliminate tax penalties due to fluctuations in income. This allows farmers to avoid receiving a tax penalty for losses already experienced due to drought, flooding, infestation and disease. For now, this provision only applies to the next two years, but Senator Roberts thinks they can extend it, "I remain hopeful we’ll be able to extend that provision through the life of the farm bill."

The agreement repeals the Alternative Minimum Tax for small business and reverses a controversial Internal Revenue Service ruling which would have applied the Alternative Minimum Tax to installment sales by farmers who use the cash accounting method.

Under the budget agreement, the top capital gains rate will be cut from 28 percent to 20 percent. For lower incomes, the capital gains rate will drop from 15 percent to 10 percent. The effective date for the cut is retroactive to May 7, 1997. In 2001, the top rate will drop to 18 percent for assets purchased after 2000 and held more than five years. The lower rate will drop to eight percent for assets held over five years. There is a housing exemption for capital gains up to $500,000 for joint filers and up to $250,000 for single filers.

President Clinton: "For family farmers who buy their own health insurance there is a provision allowing them to deduct their health care costs just like any other small businesspeople."

Currently, three million self-employed Americans can deduct only 40 percent of their health costs. Under the new provisions, the health insurance cost deduction for self-employed individuals increased to 50 percent in 1998 and will eventually be phased-in to give an 80 percent deduction. Also, they will reinstate the home office business deduction.

Several parts of the tax deal are aimed to help families. First, there is a $500 per child tax credit for families with children under the age of seventeen. Next, there is a new tax-free Education Savings Account to help parents pay for their children’s education. Congress allowed for this to apply to kids in K-12; but it appears, due to President Clinton’s opposition, that this will only apply to higher education. In addition, Individual Retirement Accounts (IRA’s) now allow a penalty-free withdrawal for education and allow work-at-home spouses to have their own IRA’s.

All of the new tax deductions, rate-drops, credits, and special provisions for certain groups will significantly increase the complexity of the tax code across the entire income spectrum. This will make more people seek the services of tax professionals. House Minority Leader, Dick Gephardt, broke with President Clinton and the bipartisan majority to vote against the bill. He had many reasons, including his desire to be the Democrat’s Presidential Nominee in the year 2000. However, in a speech on the floor of the House, he cited the increased complexity as a major reason for opposing the budget deal, "I am a tax reformer. I believe we ought to get less deductions and exemptions and special treatment. I think we need to lower rates for everybody. The bill today will add the great loophole."

Another critic of the added complexity of the tax code is Steve Forbes. Forbes sought the Republican nomination for President in 1996. He based his platform on getting rid of the IRS and replacing the current income tax system with a flat tax. Forbes had this to say in a memo he recently sent to both the Republican leaders in congress and the President, "It is time to end, not expand the IRS as we know it, downsize Washington and dramatically reduce the tax burden on the American people. Two incomes in a family still can’t do the job one income did in previous generations. That’s Washington’s fault. Bill Clinton and the GOP Congress are failing to do anything about it."

Speaking of people with Presidential ambitions, Nebraska’s Bob Kerrey -- in true Husker alumnus fashion -- used a football analogy to describe his views on the budget, "This budget is a first down, not a touchdown." Kerrey voted for the bill, but has reservations about the increased complexity of the tax code. He wants to see all Americans covered by a health care system and, most importantly, the failure to deal with entitlements. In finishing the football analogy, Kerrey said, "Americans should know we have not crossed the goal line. The budget abandoned the tough choices that would have begun to cope with the long-term growth of entitlements." Kerrey went on to explain, in detail, his concerns about entitlements: