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The Tax Cuts and Jobs Act estimated to decrease effective tax rates across farm commodity specializations had the law been in effect in 2016

Wednesday, August 22, 2018

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminates or modifies many itemized deductions and tax credits, while lowering tax bracket rates on individual and business income. Had the TCJA been in place in 2016, ERS estimates that family farm households would have experienced a decline of 3.3 percentage points on average in their effective tax rate—the share of income paid in taxes after tax credits and adjustments are taken into account. The effects of the TCJA vary across specializations. Dairy producers would have experienced the largest decline at 4.3 percentage points. This was largely due to the new TCJA deduction for business income, since dairy farmers tend to earn a higher share of total household income from the farm business. Producers of beef cattle, which represented the greatest number of farms of any specialty in 2016, would have experienced the smallest decline at 2.6 percentage points. Beef cattle producers generally operate small farms with farm income making up a lower share of their total household income, which results in smaller tax reductions than for farm households with a higher share of farm income. This chart uses data found in the June 2018 ERS report, Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households.

Under the Tax Cuts and Jobs Act, average income tax rates are estimated to decline for households across all family farm sizes

Friday, June 29, 2018

In 2016, family farm households faced an estimated income tax rate of 17.2 percent on average. However, the recently passed Tax Cuts and Jobs Act (TCJA) of 2017 eliminates or modifies many itemized deductions and tax credits, while lowering tax rates on individual and business income. The TCJA also expands some business provisions. Had the TCJA been in place in 2016, ERS estimates that family farm households would have faced a lower average income tax rate of 13.9 percent. The effects of the TCJA varies by farm size, with the greatest reduction for households operating midsized farms. The average income tax rate for households of midsized farms would have decreased by 5.8 percentage points. By comparison, the average income tax rate for households operating large farms would have decreased by 3.4 percentage points, for small farms by 3.0 percentage points. The expansion of the standard deduction is a primary reason households operating smaller farms are estimated to face lower income tax rates, while those operating large farms benefit more from reductions in individual tax rates and a new provision allowing a portion of farm income to be excluded from household taxable income (income from farming is taxed at the individual level for family farms). Midsized farms are expected to benefit from all these provisions. This chart appears in the June 2018 ERS report, Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households.

Taxable farm income has fluctuated over time

Tuesday, April 18, 2017

Nearly 90 percent of family farms are structured as sole proprietorships. These entities are not subject to pay income tax themselves; rather, the owners of the entities (farmers) are taxed individually on their share of income. Numerous Federal income tax law provisions allow farmers to reduce their tax liabilities by reporting losses. From 1998 to 2008, for example, taxable losses from farming (the red area of the chart) rose from $16.7 billion to $24.6 billion. This was due, in part, to changes in the tax code beginning in 2001 that expanded the ability of farms to deduct capital costs—such as tractors and machinery—in the year the equipment was purchased and used. Between 2007 and 2014, strong commodity prices bolstered farm-sector profits (the green area), but taxable net farm income (the blue line) remained negative. Farm sole proprietors, in aggregate, have reported negative net farm income since 1980; in other words, they’ve reported a farm loss due to higher farm expenses than income. In 2014, the latest year for which complete tax data are available, U.S. Internal Revenue Service data showed that nearly 67 percent of farm sole proprietors reported a farm loss. This chart appears in the ERS topic page for Federal Tax Policy Issues, updated January 2017.

Few farms affected by 2014 Farm Act eligibility income cap

Monday, August 8, 2016

The 2014 Farm Act revised the maximum income limitations (the income cap) that determine eligibility for most commodity and conservation programs and payments by replacing the separate limits on farm and nonfarm income specified in the 2008 Farm Act with a single total adjusted gross income cap of $900,000. Based on data for 2009-14--a period of overall increasing farm sector income--a comparison of the impact of the income caps imposed by the 2008 and 2014 Farm Acts finds that the number of potentially ineligible farms increases over the period under both income caps. The potential number of farms affected by the 2014 income cap is below the number affected by the 2008 income caps, averaging 1,500 farms per year (about 0.1 percent of all farms) for the period 2009-14. This chart is found in the August 2016 Amber Waves feature, "Farm Bill Income Cap for Program Payment Eligibility Affects Few Farms."

Most U.S. farm estates exempt from Federal estate tax in 2015

Monday, June 20, 2016

The Federal estate tax applies to the transfer of property at death. Under present law, the estate of a decedent who, at death, owns assets in excess of the estate-tax exemption amount ($5.43 million in 2015) must file a Federal estate-tax return. However, only those returns that have a taxable estate above the exempt amount (after deductions for expenses, debts, and bequests to a surviving spouse or charity) are subject to tax at a graduated rate, up to a current maximum of 40 percent. Based on simulations using farm-level survey data from USDA’s 2014 Agricultural Resource Management Survey (ARMS), about 3 percent of farm estates would have been required to file an estate tax return in 2015, while 0.8 percent of all farm estates would have owed any Federal estate tax. This chart is based on the ERS topic page on Federal Estate Taxes.

Taxable U.S. net income from farming remained negative in 2013

Thursday, April 14, 2016

U.S. farm households generally receive income from both farm and off-farm activities, and for many, off-farm income largely determines the household’s income-tax liability. Since 1980, farm sole proprietors, in aggregate, have reported negative net farm income for tax purposes. From 1998 to 2008, both the share of farm sole proprietors reporting losses and the total amount of losses reported generally increased, due in part to deduction allowances for capital expenses. Since 2007, strong commodity prices bolstered farm-sector profits and the net losses from farming declined, leading to a peak in taxable profits (though still a negative taxable amount on net) in 2012. In 2013, the latest year for which complete tax data are available, U.S. Internal Revenue Service data showed that nearly 68 percent of farm sole proprietors reported a farm loss, totaling $25 billion. The remaining farms reported profits totaling $17 billion. This chart is found on the ERS Federal Tax Issues topic page, updated April 2016.

Estate tax liability varies by farm size

Thursday, June 11, 2015

Since 1916, the Federal estate tax has been applied to the transfer of property at death. Under present law, the estate of a decedent, who at death owned assets in excess of the estate tax exemption amount ($5.43 million in 2015), must file a Federal estate tax return; those estates are subject to a 40 percent tax rate on the nonexempt amount. Based on simulations using farm-level survey data from the 2013 Agricultural Resource Management Survey (ARMS), for the 2014 tax year an estimated 2.7 percent of farm estates would be required to file an estate tax return, with a much smaller share of estates (about 0.8 percent) owing any Federal estate tax. On average, a farm estate that owed Federal estate tax had net worth of $11.1 million and a tax liability of $1.68 million, paying an average tax rate of 15 percent. Estates of small family farms (those with gross cash farm income (GCFI) below $350,000) faced the lowest average effective tax rate, while estates of large-scale family farms (those with GCFI of $1 million or more) were taxed at an average effective rate of 18 percent. This chart is found on the ERS topic page on Federal Estate Taxes, updated May 2015.

Taxable net farm income increased in 2012, but was still negative

Wednesday, April 15, 2015

U.S. farm households generally receive income from both farm and off-farm activities, and for many, off-farm income largely determines the household’s income tax liability. Since 1980, farm sole proprietors, in aggregate, have reported negative net farm income for tax purposes. Over the 1998-2008 period, both the share of farm sole proprietors reporting losses and the amount of losses reported generally increased, due in part to deduction allowances for capital expenses. Since 2007, strong commodity prices have bolstered farm sector profits and the net losses from farming have declined. In 2012, the latest year for which complete data are available, U.S. Internal Revenue Service data showed that nearly 70 percent of farm sole proprietors reported a farm loss, totaling almost $24 billion. The remaining farms reported profits totaling $18.2 billion. This chart updates the chart found in the February 2013 Amber Waves feature, “Federal Income Tax Reform and the Potential Effects on Farm Households.”

Limits on capital expensing could affect farmers' capital purchase decisions

Tuesday, April 15, 2014

Farming requires large investments in machinery, equipment, and other depreciable capital. Such investments may be treated either as a current expense and deducted from gross farm income immediately, or capitalized and depreciated over time. For the past four years (2010-2013), if the cost was treated as an expense, the maximum deduction a farm could take was $500,000. Unless the 2010-13 expensing limit is extended, it will fall to $25,000 for tax year 2014. This change could increase the cost of capital investment and significantly increase taxable income for some farms. Based on 2012 ARMS data, while 38 percent of U.S. family farms reported a capital purchase, less than 1 percent had expenses exceeding $500,000. Under a $25,000 expensing limit, 13 percent of farms would have exceeded the limit. Smaller family farms, in general, did not make investments exceeding the old limit, but about 9 percent would have exceeded the 2014 limit. Very large family farms (those with gross cash farm income in excess of $5 million) were far more likely to have capital costs exceeding both the old limit (35 percent) and the 2014 limit (78 percent). This chart updates one found in the ERS report, The Potential Impact of Tax Reform on Farm Businesses and Rural Households, EIB-107, February 2013.

Farm estate taxes vary by type of family farm

Monday, January 6, 2014

The Federal estate tax applies to the transfer of property after death. Under present law, the estate of a decedent who at death owns assets in excess of the estate tax exemption amount ($5.25 million in 2013 for an individual, $10.5 million for married couples) must file a Federal estate tax return. Based on simulations using farm-level survey data from the 2011 Agricultural Resource Management Survey (ARMS), only about 2.7 percent of family farm estates would be required to file an estate tax return in 2013, with a much smaller share of estates (about .6 percent) owing any Federal estate tax. The impact of the Federal estate tax varies by farm type. Most Federal estate taxes are owed by larger family farm estates. Although these farms account for only about 5 percent of all family farm estates, they account for 73 percent of total family farm estate taxes paid. Only about 7.3 percent of the estimated 2,103 estates involving larger family farms are likely to owe Federal estate taxes in 2013. This chart is found in the ERS topic page on Federal Tax Issues, updated November 2013.

Most farm estates would be exempt from Federal estate tax in 2013

Wednesday, November 13, 2013

The Federal estate tax applies to the transfer of property after death; it was repealed in 2010 but reinstated for 2011 and years thereafter. Under present law, the estate of a decedent who at death owns assets in excess of the estate tax exemption amount ($5.25 million in 2013 for an individual, $10.5 million for married couples) must file a Federal estate tax return, and those estates are subject to a 40 percent tax rate on the nonexempt amount. Based on simulations using farm-level survey data from the 2011 Agricultural Resource Management Survey (ARMS), in 2013, only about 2.7 percent of farm estates would be required to file an estate tax return, with a much smaller share (about .6 percent) owing any Federal estate tax. Total Federal estate tax liabilities on all farm estates in 2013 are estimated at about half a billion dollars. Historically, these amounts have been much higher. Since 2000, the exemption amount has grown considerably, while the maximum tax rate has fallen. Consequently, the share of estates required to file a return or pay taxes has fallen. This chart is found in the Federal Tax Issues topic page on the ERS website, updated November 2013.

A growing number of families receive the earned income tax credit

Friday, May 10, 2013

The earned income tax credit (EITC) was enacted in 1975 to reduce the burden of Social Security taxes on low-income workers and to encourage them to seek employment rather than welfare benefits. The amount of the credit depends upon the number of qualifying children in the household and the level of earned and adjusted gross income. As a refundable tax credit, the EITC results in lower tax liabilities for qualifying low-income households that owe Federal income taxes and cash payments to those owing no taxes. The EITC has expanded over the past two decades and represents an increasing share of total Federal support to low-income households. In 2009, the credit provided roughly $55 billion to over 25 million low-income workers and their families. Rural households have historically had lower incomes and higher poverty rates than urban households. As a result, a disproportionately large share of rural taxpayers benefit from the EITC. In 2008, 21.6 percent of rural taxpayers received EITC benefits, compared with 16.9 percent of urban taxpayers. This chart comes from the ERS report, The Potential Impact of Tax Reform on Farm Businesses and Rural Households, EIB-107, February 2013.

For most farm households, farming reduces Federal income tax liabilities

Monday, April 15, 2013

U.S. farm households generally receive income from both farm and off-farm activities, and for many, off-farm income largely determines the household’s income tax liability. Since 1980, farm sole proprietors, in the aggregate, have reported negative net farm income for tax purposes, and over the last decade, both the share of farmers reporting losses and the amount of losses reported generally have increased even as farm sector income hits historic highs. In 2010, the latest year for which complete data are available, U.S. Internal Revenue Service data showed that nearly three out of four farm sole proprietors reported a farm loss, for almost $24 billion in losses. The remaining farms reported profits totaling $12.3 billion. Since only about 60 percent of those reporting a farm profit owed any Federal income taxes, only about 19 percent of farm sole proprietors paid any Federal income tax on their farm income in 2010. This chart is found in the February 2013 Amber Waves feature, Federal Income Tax Reform and the Potential Effects on Farm Households.

Large farms are most likely to be affected by changes in business expensing limits

Tuesday, March 12, 2013

The ability of business owners, including farmers, to deduct the cost of depreciable capital in the year of purchase reduces their tax liability and encourages additional investment. Although the cap is scheduled to drop in 2014, the American Taxpayer Relief Act of 2012 extended provisions allowing depreciable property to be expensed currently, while retroactively raising the 2012 expensing limit. Based on the 2010 Agricultural Resource Management Survey (ARMS), about 18 percent of all farms reported investing more than the prior 2012 expensing limit of $139,000, while just over 1 percent invested more than the revised limit of $500,000. If the expensing limit drops to $25,000 in 2014, as current law provides, large farms would be affected most. Less than 20 percent of small farms (those with less than $250,000 in annual sales) invested more than $25,000 in 2010, while nearly 55 percent of large farms reported capital purchases exceeding that amount. This chart is found in the February 2013 edition of Amber Waves magazine.

Most farm estates exempt from Federal estate tax

Wednesday, February 13, 2013

As a result of the American Taxpayer Relief Act of 2012, the current amount that can be transferred to the next generation free of Federal estate tax is $5.25 million ($10.50 million for a married couple). Based on simulations using farm-level survey data from the 2011 Agricultural Resource Management Survey (ARMS), only about 1.5 percent of farm estates would be required to file an estate tax return, and only about half of these estates or 0.7 percent would owe any Federal estate tax. This chart updates information found in the Federal Tax Issues topic page on the ERS website.

A growing number of families have received the earned income tax credit since its creation

Monday, July 9, 2012

The earned income tax credit (EITC) was enacted in 1975 to reduce the burden of Social Security taxes on low-income workers and to encourage them to seek employment rather than welfare benefits. The amount of the credit depends upon the number of qualifying children in the household and the level of earned and adjusted gross income. Originally, the credit was limited to a maximum of $400 per year for a qualifying household, but subsequent legislation expanded the basic credit and provided larger credits for families with two or more children. In 2008, the EITC provided an estimated $51.5 billion to nearly 25 million low-income workers and their families, for an average of $2,063 per recipient. Since rural households have historically had higher poverty rates than urban households, rural taxpayers benefit disproportionately from programs targeting low-income workers, such as the EITC. This chart appeared in "Rural America Benefits from Expanded Use of the Federal Tax Code for Income Support" in the June 2011 issue of ERS's Amber Waves magazine.

Geographic distribution of EITC to rural filers

Monday, May 16, 2011

The Earned Income Tax Credit (EITC) allows a rebate to the taxpayer of any balance after the credit is applied against the tax owed to the IRS. The impact of the EITC on the rural poor is indicated in part by the geographic distribution and share of tax return filers receiving the credit. The percentage of rural taxpayers who received the EITC in 2007 was greatest in the South, where a large percentage of the Nation's rural poor has historically resided. The median rate of the EITC receipt for Southern States is 21.2 percent of rural households that filed a tax return. This compares with 13 percent of rural households in Northeastern States and 15 percent in the Midwest and the West. These differences reflect higher average income levels in rural areas outside of the South, particularly in the Northeast. This map appeared in the ERS bulletin, Federal Tax Policies and Low-Income Rural Households, EIB-76, May 2011.

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