The Trump Administration, the House Ways and Means Committee, and the Senate Finance Committee announced last week they have agreed to a unified framework for federal tax reform. The framework outlines several tax proposals for both business and individual filers. Many details remain to be filled in, and legislation needs to be written, but the unified framework does provide some guidance for farmers and ranchers on issues they should monitor as the tax discussion evolves.
Most farm and ranch operations in Nebraska file federal taxes as individuals (Form 1040). The 2012 USDA Census of Agriculture reported that 85 percent of Nebraska farms claimed the legal status of a family or individual for tax purposes. The average annual federal income tax after credits reported on returns filed by Nebraska farm sole proprietors was $443 million for 2009-2015 according to the Internal Revenue Service (IRS) data (2013 was not included as data was not readily available). The average annual effective rate of taxation on farm returns over this period was 14 percent, which was two percentage points higher than the effective rate for all Nebraska individual returns over the same period.
For individual filers, the unified framework proposes to double the standard deduction, consolidate tax brackets from seven to three, lower the top rate from 39.6 percent to 35 percent, eliminate itemized deductions except for mortgage interest and charitable deductions, repeal personal exemptions for dependents but increase the child tax credit, and repeal the alternative minimum tax. So, what are the tax implications for farmers and ranchers?
Like most Nebraskans, most producers claim the standard deduction on their individual returns. In 2015, according to IRS, 72 percent of Nebraska farm returns claimed the standard deduction. Thus, doubling the standard deduction has the potential to reduce taxes for these filers subject to other changes in tax brackets and rates, which are not known now. For producers who itemize, total Schedule A deductions amounted to $196 million in 2015, excluding home mortgage and charitable contributions. Losing these deductions, and what it means in ultimate taxes paid, will depend on individual filer’s amount of itemized deductions relative to the increase in the standard deduction, and ultimately, the changes in tax brackets and rates. The proposals addressing the child tax credit and repealing the alternative minimum tax will have little impact on farm and ranch taxes. Combined, the two provisions amounted to $23 million for farm tax filers in 2015, or 0.7 percent of reported adjusted gross income that year.
At this point, because all the details on tax brackets and rates are not known, the implications of federal tax reform for farmers and ranchers are difficult to grasp. The changes to business taxes will also have implications for farm and ranch operations. Future Tidbits will highlight provisions in the unified framework for businesses and other taxes that might impact farmers and ranchers. Tidbits will also return to the topic of changes for individual filers when more is known on changes to brackets and tax rates.
Jay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide in-depth examination of key issues affecting Nebraska’s farmers and ranchers.