With the extension of the Bush tax cuts, Jasper County married people can shield $10.5 million, either in life or death, without being taxed. A single person can shield $5.25 million.
Because of inflation, taxpayers can shield more money compared to the previous year. In 2012, an individual could shield about $5 million. Now an individual can shield about $5.25 million. Inflation is expected to rise, and so will shielding limits.
Local attorney Bruce Nuzum was not happy with how long it took the bill to pass, but those with substantial estates, especially farmers, will benefit from estate and gift tax exemption. Details about the bill are pending.
“If it did not pass, they would have been back down to $1 million (to shield) with no carry over,” Nuzum said. “That is what they were facing, when they were talking about the fiscal cliff.”
“The (federal) estate tax, unlike inheritance tax, affects everything from life insurance to retirement funds, to real estate, to money in the bank,” Nuzum said. “Between husband and wife, you have got about $10.5 million on which they will play zero (on) federal estate taxes, provided that they have not made lifetime gifts. It’s a mean tax once it starts.”
Although $10.5 million may seem a lot, it is not to farmers, as it is expensive to be in the agriculture business. Farms are worth more, and maintenance costs can take the majority of profits. Land prices rose because of the biodiesel industry. On paper it looks good, but when a farmer dies, it can be an issue.
“If you start talking land values, it doesn’t take a great deal of acres to start hitting $5 million,” Nuzum explained. “Now if they are single, they have a problem. If they got a spouse, you can shield up to $10.5 million — there is no problem. Beyond that, they will pay 40 percent.”
The federal estate and gift tax rate rose. Last year, it was 35 percent. This year, it is 40 percent. If a farm is worth $19 million and the farmers are married, they can give $10.5 million away to their children. The other $8.5 million would be taxed 40 percent. That means $3.4 million would be lost in taxes, a difference of about $400,000 compared to last year.
Another change in the bill was the federal annual exclusion gifts. Just like the estate and gift exemption, the annual exclusion gifts is based on inflation. An individual can now give $14,000 per year. Nuzum believed it increased about $1,000 from 2012. This is exempt from the estate and gift exemption.
Nuzum said a problem can occur if a recipient of a previous inheritance inherits more money from another party. That can be a federal estate tax problem, depending on the recipient’s income.
When designating a spouse, Nuzum recommended to investigate the total net gain of both parties.
“Let’s say a person has an estate worth $1 million dollars,” Nuzum said. “They owe no federal estate taxes. They are not required to file a return, but they give $1 million to a spouse who has $5 million of their own, so now it’s a total of $6 million. For the second estate of $6 million, to be exempt of the $10.5 million rule, we have to file a federal state tax in the first estate that says — (The money) went to my spouse. The marriage deduction applies, therefore I have $5.52 million, unused exception that flows over to my spouse.”
Nuzum noticed a different bill, that may have been passed earlier, introduced a 3.8 percent tax that paid for Medicare. It will affect taxpayers with incomes greater than $200,000; $250,000 if married filed joint.
“Historically Medicare and Social Security have been funded by a tax on earned income, like wages — not from interest, dividends, capital gains or rent,” Nuzum said.
Nuzum said an upcoming issue for farmers will be representatives in government. Compared to previous years, there are less farmers. As the numbers shrink, this means fewer tax breaks for farmers. He said farmer populations are not at that point yet.
“As farmers get bigger, they become more like a sophisticated business,” Nuzum said. “Today’s farmer is a shrewd businessman. He has to be, or he will go broke.”
Nuzum reminds people to keep in mind the Iowa inheritance tax.
“A lot of people who are living together don’t realize about the inheritance tax, and (when) some of their property goes to their fiance, that’s going to be subject to an inheritance tax,” Nuzum said. “I know of people who have been living together for the past 20 years, who have children — I do not know why they are not married, but they aren’t. They may get a nasty surprise when one of them dies.”
Staff writer Matthew Shepard may be contacted at (641) 792-3121, ext. 425, or at mshepard@newtondailynews.com.