Federal tax policy plays an important role in the well-being of farm and rural households and the viability of farm operations. In recent years, Federal income taxes on both farm and nonfarm income accounted for nearly two-thirds of the total Federal tax burden for farmers, while Social Security and self-employment taxes represented nearly a third. These taxes can have a significant effect on the financial well-being of farm households, with impacts varying by farm household type. Beyond a farm operation's income, the tax code influences farm management and other decisions, such as capital purchases and dispositions, and farm estate planning. The tax code can also affect eligibility for Federal program payments because they are linked to measures of adjusted gross income. For example, a person or legal entity with a 3-year average adjusted gross income that exceeds $900,000 will not be eligible to receive Livestock Forage Disaster payments or Market Facilitation Program payments.
The Federal tax code also affects the well-being of rural households. Rural households have lower incomes than urban households and are more likely to live in poverty. Through the use of refundable tax credits, the tax code assists low-income families, particularly those with children.
ERS research focuses on features of Federal tax law, the effects of Federal taxes on agriculture and the broader rural economy, and the impact of significant tax reform and other tax proposals. ERS also conducts research related to the use of the Federal tax system for the delivery or targeting of farm program benefits, including income caps for farm program payment eligibility.
ERS research findings indicate that:
- The Tax Cuts and Jobs Act (TCJA), enacted in December 2017 and amended the following March by the Consolidated Appropriations Act of 2018, reformed multiple provisions within the tax code. ERS estimated that had the TCJA been in effect in 2016, family farm households would have faced an average effective income tax rate of 13.9 percent that year versus the actual rate of 17.2 percent under the existing law at the time. Using 2017 data from ARMS, ERS researchers found that tax liabilities would have declined slightly for most farm sizes in 2017 relative to the 2016 estimate. Had the TCJA been in effect in 2017, the average effective tax rate for family farm households would have been more than a percentage point lower than had it been in effect in 2016, or 12.8 percent. By comparison, the actual effective tax rate in 2017 was 16.8 percent. The average effective tax-rate estimates factor in several tax credits (the Child Tax Credit, Earned Income Tax Credit, and Child and Dependent Care Tax Credit) and exclude self-employment taxes. ERS estimated the impact of TCJA on farm households using data from USDA's Agricultural Resource Management Survey (ARMS) and an individual tax model developed by ERS researchers. See Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households (ERR-252, June 2018) and The Tax Cuts and Jobs Act Would Have Lowered Average Income Tax Rates for Farm Households between 2016 and 2017 (Amber Waves, April 2019), for more information.
- Using data from USDA's Agricultural Resource Management Survey (ARMS), ERS estimated the impact of the estate tax for the roughly 38,106 farm estates (out of a total 2.0 million family farms) likely to have been created in 2018. An estimated 230 farm estates, representing 0.6 percent of all estates, would have been required to file an estate-tax return. After accounting for adjustments, deductions, and exemptions to the estates, 0.35 percent of farm estates in 2018 were estimated to owe any estate taxes.
- Past research has shown the use of Federal income tax credits, such as the earned income and child tax credits provided a substantial boost in income to low- and middle-income rural taxpayers and has reduced the rural poverty rate. See Federal Tax Policies and Low-Income Rural Households (EIB-76, May 2011), for more information.
- Income caps on eligibility for farm program payments specified in Farm Bill legislation typically affect only a small number of farm payment recipients each year, and the impact varies by farm type and organizational structure. See Effects of Reducing the Income Cap on Eligibility for Farm Program Payments (EIB-27, September 2007) and an update to this research in the Amber Waves feature (August 2016) "Farm Bill Income Cap for Program Payment Eligibility Affects Few Farms" for more information.