Taxpayer Relief Act of 2012: What does it mean to Ohio farmers?

By David Marrison, OSU Extension associate professor & Chris Bruynis, OSU Extension assistant professor

See what farm groups are saying about the bill here.

WASHINGTON, D.C. — Congress worked overtime over the New Year’s Holiday to pass the American Taxpayer Relief Act of 2012 and it was signed into law by President Obama Jan. 2.

There are many provisions which are allowing members of the agricultural community to breathe a sigh of relief as they head into 2013 and some provisions, such as the farm bill, will cause much debate in the upcoming months.

Farm bill extended and no cows went over the cliff

The Taxpayer Relief Act includes a nine-month partial farm bill extension. With consumers up in arms over milk prices rising to $7 to $8 per gallon because the milk subsidy program would revert back to an antiquated parity-based price support formula that was implemented in 1949 and would have increased milk prices to close to $40 per hundredweight, more than double the current milk price.

This extension of the current subsidy program through Dec. 31 will keep milk prices stable. Basically, Congress kicked the can down the road on the farm bill and making any corrections to the milk pricing system.

This extension also extends $5 billion worth of government subsidies for commodities such as corn and soybeans. Other programs including conservation, organic growing, fruit and vegetable, and beginning farmer and rancher programs were also extended but at lower funded levels.

It should be noted that the direct payments were targeted for elimination during the farm bill discussions this past year. The Senate passed a farm bill extension in June but the House never voted on its own version, leading to a stalemate which ended with the partial extension.

Congress will now have until Oct. 1 when the new fiscal year begins to pass a more typical five-year extension. Many expect the key components of last year’s farm bill proposals — an end to direct payments, new crop insurance programs and cuts in nutrition initiatives — to be included in the new legislation. At any rate, it will make for an interesting farm bill negotiation in 2013.

The bill also extends supplemental disaster assistance programs by amending the federal crop insurance act to include 2013. This raises questions for which answers are not known at this time.

The first is the option for farmers wanting to exit from the average crop revenue protection program (ACRE). Since the original rule was farm signed into ACRE must stay enrolled in ACRE, does this extension force farmers to stay enrolled through 2013? Also the supplemental revenue assistance payments (SURE) status is unclear at this time for 2012 and 2013.

Individual and capital tax rates

The bill permanently retains the 10 percent, 15 percent, 25 percent, 28 percent, and 33 percent income tax brackets. The 35 percent tax bracket ends at $400,000 for single filers and $450,000 married filing jointly. Above this threshold, there’s a new 39.6 percent tax bracket.

Likewise the bill permanently retains the zero percent and 15 percent tax rates on qualified dividends and long-term capital gains, and adds a new 20 percent tax rate that would apply to taxpayers who fall within the new 39.6 percent tax bracket. Which capital gains tax rate will apply depends on what tax bracket a person is in.

The new capital gains tax rates for 2013 and future years will be zero percent applies to capital gains income if a person is in the 10 percent and 15 percent tax brackets, 15 percent applies to capital gains income if a person is in the 25 percent, 28 percent, 33 percent, or 35 percent tax brackets 20 percent applies to capital gain income if a person is in the 39.6 percent tax bracket.

Federal Estate Tax

This legislation permanently maintains the federal exemption for gifts and estates estate tax exemption at $5 million instead of dropping to $1 million. This amount will also be indexed for inflation and includes the transfer of the unused exemption of a deceased spouse to the surviving spouse. It should be noted that this legislation included the word “permanent.” This is significant as many fiscal agreements made by Congress since 2001 have contained a phase out date. The top rate to tax amounts in excess has increased from 35 percent to 40 percent.

But for many this was an acceptable compromise since it was scheduled to drop to $1 million with the excess taxed at 55 percent in 2013. This portion of the legislation should allow many farm families to sleep easier as they make plans to transition their farm businesses to future generations.

Section 179 Increased & Extended

Internal Revenue Code Section 179 allows farms and other businesses to write off small amounts of annual investments in capital assets, such as machinery, in the year of purchase in lieu of depreciating the investment over a number of years.

The 179 deduction was reverted (increased) back to the old 2010/2011 level of $500,000 for 2012 and 2013. This is a huge incentive given that up until this legislation was passed the 2012 limit was $139,000 and it would have dropped to $25,000 in 2013. Since this bill was not passed until the final hours, the increase to $500,000 for 2012 will most likely not help farmers unless they had purchased equipment in excess of $139,000 and had planned on just putting it on a regular deprecation schedule. It should be noted that this deduction will revert back to $25,000 beginning in 2014. However, as always, time will tell.

Bonus Depreciation Extended

This legislation also extended the special 50 percent special depreciation allowance, also known as bonus depreciation, through the end of 2013. The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. Bonus Depreciation is now scheduled to be eliminated for the 2014 tax year.

Payroll Taxes

In 2011, Congress had lowered the FICA payroll tax rate from 6.2 percent to 4.2 percent to put more money in the pockets of Americans. This adjustment expired at the end of 2012. This will result in a payroll tax increase for workers. For example, a farm employee earning $30,000 a year will take home $50 less per month.

Conservation Easement Donations. The special break for conservation easement donations was extended through 2013.

Want to learn more? The complete American Taxpayer Relief Act of 2012 can be accessed at http://www.govtrack.us/congress/bills/112/hr8/text.

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