The Fiscal Cliff Deal: Impact on Private Landowners and Conservation

The Fiscal Cliff Deal: Impact on Private Landowners and Conservation
The American Taxpayer Relief Act of 2012, or the “fiscal cliff” deal, was passed by Congress on January 1, 2013 and signed into law by President Obama the next day. The Act was necessary to avoid extreme tax hikes and the reinstatement of outdated laws and policies.

Highlighted here are areas of the Taxpayer Relief Act ("Act") that impact private landowners; the farm bill extension, estate and tax planning updates, and the renewed enhanced conservation easement tax incentive. Each of these play an important role in ensuring that farmers, ranchers, and other private landowners can keep their working lands working, thus preventing sprawl and development of rural landscapes.

The Farm Bill Extension

The “2008 Farm Bill,” or the Food, Conservation and Energy Act of 2008 was an agricultural policy law that created $288 billion in subsidies to promote research and development of energy, conservation, nutrition and rural development programs. Some of the notable conservation programs are run by the USDA, such as the Conservation Stewardship Program (CSP), Farm and Ranch Lands Protection Program (FRPP), Wetland Reserve Program (WRP) and the Grassland Reserve Program (GRP).

The 2008 Farm Bill expired in October 2012, which prompted the House and Senate Agriculture Committees to draft new farm bills. Either of the bills, if enacted, would have provided much needed certainty for farmers, ranchers and other private landowners for the next five years and could have been key in addressing the country’s need for sustainable agriculture. Read more. Unfortunately, both bills were lost in the fiscal cliff negotiations. Only under the threat of the “dairy cliff”- or the doubling of milk prices- did Congress extend portions of the 2008 Farm Bill via the Act. Debbie Stabenow (D-Mich.), chairwoman of the Senate Agriculture Committee, said the extension "reforms nothing, provides no deficit reduction and hurts many areas of our agriculture economy."

The Act only reinstates some provisions of the 2008 Farm Bill, such as the biodiesel tax incentive and wind energy tax credits, and allows old and unworkable policies to continue for the next year. Most notably, the Act continues costly direct cash payments that are too often given to already profitable businesses and is seen as a blow to small farmers. Read More. While the Act continues to provide funding for the FRPP, WRP and GRP, it is unclear on how much will be available, especially since extreme funding cuts to these programs are expected. Read more. Finally, the Act does not extend mandatory funding for energy title programs, which are important for job creation and economic growth in rural America. Nor does it include the organic provisions or provide disaster relief for livestock and fruit producers.

The Farm Bill extension will expire in 9 months, which leaves little time to draft a new farm bill. The new bill will have to address all the issues that have been put on hold, as well as fitting five years of budget cuts into four. Read More. Also daunting, is the fact that there is a new Congress, a new head of the House Agriculture Committee, and that there will be multiple “fiscal cliff”-like situations that the representatives will have to face on different issues before then.

Enhanced Tax Incentive for Conservation Easements Renewed

Since 2006, Congress has renewed the enhanced tax incentive for donating conservation easements. The Act reinstates this provision for 2013, which is excellent news for landowners looking to protect their property. Not only does the enhanced tax incentive make it more feasible for landowners with farms, ranches and forests to protect their land from development, it also increases the ability to continue making a living from the land with help from tax deductions.

The enhanced tax incentive raises the deduction a donor can take for donating a conservation easement from 30% of their adjusted gross income in a year to 50%. Second, it allows qualifying farmers and ranchers to deduct up to 100% of their adjusted gross income. Third, it extends the carry-forward period for a donation from 5 to 15 years (in addition to the year of donation).

During fiscal cliff negotiations there was a lot of chatter about applying a cap on the charitable deduction. A cap would have severely restricted the amount landowners could deduct for donating land or an easement, which tend to be larger deductions. Fortunately, the Act leaves the charitable deduction largely intact.

The Act also extends the IRA Charitable Rollover incentive. The IRA Charitable Rollover permits taxpayers aged 70 ½ years or older to make donations directly to charitable organizations from their IRAs without counting it as part of their AGI, which means that they would not have to pay taxes on their donation. Read More.

However, the Act reinstates a version of the “Pease Amendment.” The Pease limitation reduces a deduction by 3% of the taxpayer’s AGI that is over a certain threshold. It applies to itemized deductions when a taxpayer’s income exceeds $250,000 for single taxpayers and $300,000 for those filing jointly. This limitation may pose a threat to charitable giving, however, it is important to note that no more than 80% of the deduction can be lost and several deductions are exempt. Read More.

Estate and Tax Planning

On January 1, 2013 Bush era tax cuts were due to sunset, which would have reinstated old laws and resulted in various estate tax hikes. One of the most notable provisions would have been a reversion to the $1 million federal estate tax exemption with any excess taxed at 55%. This would have been devastating to landowners who want to pass their land to future generations, as so much more of the value of the land would be subject to estate taxes. Fortunately, the Act successfully prevented this and other large tax hikes, as well as making the new provisions permanent. However, if Congress seriously seeks tax reform in the future, the rules may change again.

First, the Act sets the federal exemption for the gift and estate tax and generation-skipping transfer (GST) tax at about $5 million ($10 million for couples), but increases the top rate to tax amounts in excess from 35% to 40%. This means that if your estate is valued over the threshold amount you will be paying a higher estate tax than in recent years. The good news is that the threshold is staying at the same level, instead of dropping significantly and subjecting many more taxpayers to estate taxes.

Second, the Act maintains the unified treatment of estates, so the $5 million exemption applies to both lifetime gifts as well as bequests at death. This is important if you are looking to create a trust or make lifetime gifts of property to reduce the value of your estate at death.

Third, the Act maintains the portability rule. This means that a surviving spouse, after the death of their spouse, can acquire any unused portion of the deceased spouse’s exemption and add it to their own exemption. This is a helpful estate planning tool, but should not be used as a substitute for estate planning in general.

Fourth, both valuation discounts and grantor retained annuity trusts (GRATs) have been maintained by the Act and remain viable tools for reducing estate taxes.

Fifth, individual and capital gains tax rates have mostly remained the same, except for higher-income taxpayers. The Act adds a 39.6% tax bracket for single taxpayers earning over $400,000 ($425,000 for head of household and $450,000 for married taxpayers). Taxpayers in the 39.6% tax bracket now face a 20% tax rate on dividends and long term capital gains. Read More.

Finally, in terms of conservation easements, the Act has retained the estate tax exclusion for up to 40% of the restricted value of the land protected by the easement. The exclusion, under IRC section 2031(c), is capped at $500,000 and may be further reduced in cases where the easement reduces a property’s value by less than 30%. You can take advantage of this exemption if you have a conservation easement already on your land, further reducing the amount you will pay in estate taxes.

This article is intended to be an overview of the fiscal cliff deal, but should not be considered legal or tax advice. Please use the Private Landowner Network’s Conservation Yellowpages to find attorneys, CPAs, land trusts and programs in your area!