The American Family Plan: what does it mean for your farm operation?

Narrator: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com. And now here is your host, Chris Barron.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today we're going to have a little conversation around the American Families Plan, which was a proposal brought by the Biden administration last week. We've got with us Paul Niefer. How's it going, Paul?

Paul

Neiffer: Doing good. We're actually having pretty nice weather out here. We got a little bit of rain this weekend. And when I say little, maybe a tenth of an inch. But since we've only had a quarter of an inch since the 1st of February, that's actually pretty good. Yeah.

Chris

Barron: So you guys, we're almost as dry as you guys, it sounds like.

Paul

Neiffer: Yeah, we're pretty dry. I, you know, after I think 2 years of almost Well, I know last year was a record yield for this area, and the year before was pretty good. This, this is not looking very good this year.

Chris

Barron: Yeah, well, we're, um, we, as we record this here on, on Monday the 3rd, we just got some rain here today. A lot of operations are done planting, a lot have a little ways to go yet, but I just talked to a producer in central Iowa and he said he had about 6/10 of an inch, but you didn't have to go very far from him and they had 3 inches. So. And we got, we settled the dust here. So it's, it's definitely the haves and the have-nots again. And, and the, the rainfall and the weather is about as variable as the markets, I think.

Paul

Neiffer: So yeah, yeah. And that's pretty variable. I mean, what was it this morning? Last night was almost, I won't say limit up, but it was up quite a bit. And then this morning it was down quite a bit. And then it sort of rallied and You know, was, uh, I think what the old crop was down a little, new crop maybe up a little bit. But I think we're going to get used to that for the next, at least the next 2 months.

Chris

Barron: Yeah, volatility. And, and so that's a good segue, I think, here into having a conversation around tax proposals. It's creating a little volatility. And, and yeah, I got picked on a little bit last time from our conversation from, from some of our Democrat friends that we were being a little hard. So I don't really, really want to be partisan here, but I do— we do want to get the facts out here on what these proposals are, what they might mean to us as producers, and sometimes some unintended consequences. And we'll get to that, but I want to start out with having you tell us the good things in this most recent proposal, the American Families Plan? What are some of the things that you see as shining stars in that?

Paul

Neiffer: Well, the benefits are really orientated toward what I call younger farmers or farm couples with kids, you know, essentially preschool now. And then again, this assumes all the plan goes through as is, which we know is not going to happen, but 3-year-old and 4-year-old preschool will now be free. However, it's going to be in conjunction with the states, so it's going to, I think, be similar to the Medicaid program, which means your states may have to raise taxes to pay for it. So again, none of this stuff is really free. It's just whoever benefits from it is getting it free, but somebody else is going to be paying for it, right? Community college education for the first 2 years will be free.

Uh, there's also going to be some direct assistance to let's say historically Black colleges and universities, some of the tribal colleges, and then other institutions that are serving Hispanics, Asian Americans, and Native Americans. Also families, and again, this, this could be very helpful for younger farmers. You know, childcare can be a very large expense. I mean, you easily can spend $10,000 to $20,000 a year on childcare. If your income is lower, under this plan it's going to be free. If you're moderate income, for some farmers they could definitely be moderate income, it's going to be capped at 7% of your gross income. What's moderate income? I'm guessing for a family probably in that $70,000 to $100,000 range will be moderate. It'll probably phase out once you go over about $150,000, somewhere in there.

It's doing, it's now going to create a national comprehensive paid medical and family leave program. You know, the CARES Act sort of brought that in. Now this is going to be sort of— but it was only for last year. Well, I think it got expanded into the first 6 months of this year. But now it's going to be permanent. Also, there was the child tax credit where it was increased from $2,000 to $3,000 plus an extra $600 for kids that are either under age 6 or 6 and under. I can't remember exactly on that. That it was just for 2021. Now they want to extend that through 2025. And then the Child Care Credit, where historically you've been able to maybe get a credit against your child care expenses, let's say of $1,000 approximately if you had 2 or more kids. It's not quite that high, but it's close.

Now it's expanded up, maybe you can get a credit of $8,000 But if you're, you know, if you're a moderate family and 7% is coming out of your pocket, maybe this child care credit is going to offset that so it will end up being free. Not sure on that. And then there's a bunch of other things that— ACA premium, there's some changes there. But that's really the big benefits that are allowed or that are shown in the plan.

Chris

Barron: You talked about the— community college being free, which is kind of a neat deal for a lot of farm families. But what about the state universities? Can't— wouldn't that be a negative to them if people were going to go for 4 years to state college and they say, well, I'm going to go to the community college first, then I'm only going to be at the state college for 2?

Paul

Neiffer: Yeah, and again, the law of unintended consequences. You're exactly right. Why would somebody want to go to Iowa State or University of Iowa for the first 2 years when they got to pay— what is the tuition now, $10,000, $15,000, $20,000 a year, whatever it might be— whereas they can go to the local community college and get that free for the first 2 years. So yeah, like I say, anytime you have major programs like this, you're going to have unintended consequences. Some of those consequences might be good, but other consequences are going to be bad. So that's, that's what's— even the preschool You know, if you're going to make preschool free, everybody's going to sign up for it. We already have a labor shortage. I mean, we can't get enough labor to work for us. And right before the pandemic, we were at, you know, 2%, 3% unemployment.

Where are they going to get all these people to teach preschool? You know, I'm, you know, it'll be interesting.

Chris

Barron: Yeah, the college thing. And, and you used Iowa and Iowa State, and we do need to throw in Purdue, Ohio State, um, all of those others too.

Paul

Neiffer: Texas A&M, Kansas State. Yeah, I, I just threw in Iowa because I know you're from Iowa, so that's, that's why. Yep, yep.

Chris

Barron: But I just— that, that worries me a little bit because I, I just— you can see what's going to happen there. The state colleges are not gonna— it's not gonna, not gonna sit super well, I don't think, there. So, um, nope. Okay, so let's— we're talking about unintended consequences here. We talked about a lot of the good things. You know, there are some, some good things in here, and I think the intentions are always good, I think, from everybody, to be fair. There's just always 2 ways or 3 or 10 ways sometimes to go about how you want to do some things. Talk a little bit about what some of the other unintended consequences might be, or, or give us some of the things that you feel like from a tax person's perspective, what are some of the issues?

Paul

Neiffer: Well, let's talk about how they're going to pay for it.

Chris

Barron: So—

Paul

Neiffer: Exactly. First, they're going to bring back the top tax rate of 39.6%. It's going to apply if your income's roughly $400,000 or $500,000, whether you're single or married, that's when that top rate's going to kick in. Now, that's— I don't know if that's a huge change. I mean, right now it's 37%. Going to 39.6, 2.6% increase. Yeah, maybe, maybe we can live with that. But if you have capital gains, and we're going to talk about 1031 gains here in a minute, but if you have capital gains and your overall income including the capital gains is over $1 million, that's also going to be subject to a 39.6% tax.

They also have this provision that now anytime you do a deposit at the bank,— and we don't know all the details, but it sounds like anytime you do a deposit at the bank on any of your accounts, brokerage accounts, you know, bank accounts and so on, that you're going to get a 1099 at the end of the year, and you may have to reconcile that and tell the government, hey, this deposit of $10,000 was for this, this deposit of $50,000 was for this, etc., etc. Again, we don't have all the details, but they think that rich people have been avoiding taxes, so they figure if they show all the deposits and make them reconcile that, that's gonna generate a lot of money. So we'll see what happens on that. We also think, it wasn't mentioned, but we've heard that they're definitely talking about this, if your income's over $400,000, you're not gonna get the 199A deduction, that 20% deduction. Mm-hmm.

They're essentially going to incorporate the state I'll take that back. We had a discussion on that maybe about a month ago, but that's when you pass away or you— let's back up. Either during lifetime or at death, you transfer appreciated property to your heirs. Now, if it goes to your spouse, no big deal. But if it goes to your kids, to relatives, to whoever it might be, as long as it's not charity, if the gain is greater than $1 million, you're going to pay tax on that excess above the $1 million. Now, you're still going to get a step-up. You know, people keep saying they're eliminating the step-up. No, they're not eliminating the step-up. They're making you pay a tax to get the step-up. And I don't think people want to pay a tax, an immediate tax in the year of death or when the transfer is made during lifetime to incur that tax just to get a step-up. You know, a couple other things.

If you— there was the net investment income tax that was passed as part of Obamacare back in 2009. It didn't start coming into effect until 2013, but that's that extra 3.8% tax on investment income. Well, President Biden has called this sort of a loophole. Well, it wasn't. This was how the law was written. He says people have been avoiding this tax. Well, no. IRS came out with regulations telling us how to do this. They just want to raise more revenue. So for those farmers that operate as an S corporation or those farmers that operate as a manager-managed limited liability company, likely all their income, if it's above $200,000 or $250,000, is going to be subject to an extra 3.8% Medicare tax, which likely is not deductible or could be not deductible. So that's, that's, that's an extra 3.8%. And then here's something that's going to affect a lot of farm families.

If you do a 1031 exchange where, let's say you have a half section of ground, you know, it's 320 acres, it's nice ground, it's worth $4 million, just as an example, but you bought it 40 years ago for $1 million, you know, that extra $3 million of gain under current rules, if you sell that land and you reinvest it in other farmland within 180 days and you meet some other rules, but as long as you do that, you don't owe any tax. And then when you finally pass away owning that ground— oh, sorry about that— owning that ground, you're gonna have— your heirs are gonna have a step-up in basis on that property. So that's good. Well, this rule says if that gain's greater than $500,000, in my example it's $3 million, you're gonna pay tax on that $2.5 million. Now you get step-up, but on land you can't deduct land, so that doesn't gain us anything.

So, you know, a lot of farm families, they're gonna try to sell land, buy new land, spend all their cash, and then find out they owe $1 million of tax. 'Cause remember, this tax is gonna be, the rate on amounts above $1 million is gonna be basically 40, percent plus state tax, you're going to be paying 50%, but you don't have any cash. So that's going to be a big deal for a lot of our farmers out there. And then there's a few other miscellaneous items, but those are the big items.

Chris

Barron: So that's gonna essentially— well, let me first ask, I mean, what are the odds of that? That was one of the things that I, I was questioned on from the last podcast we did as well. A lot of that stuff won't go through. Probably. So what are the odds of like that going through for a farm family to have to deal with, you know? Because I mean, let's face it, your average farm family anymore, you know, that 320 or in a lot of cases 1,000 acres is not, you know, it's pretty normal. And so, and yeah, maybe I have that 320 like you said, that's you know, 10 miles away, and, and all of a sudden there's an opportunity to buy, you know, like-kind— the next door, right? That's right next door, and you can swap with somebody. It's gonna make it— that type of thing would make it impossible to swap. What are the odds? I mean, do you think that's really something that, that's plausible?

Well, they would go through again.

Paul

Neiffer: President Obama back in his administration had proposed it, but not $500,000, it was $1 million. So you could have a gain up to $1 million, and above that would be taxable. The real estate lobby is a fairly strong lobby. However, this is not a normal year. We have a— we sort of have a— I'm not going to call it a Democratic wave. I'm going to call it a progressive wave. You know, the progressives are trying to, you know, bring all these benefits for, you know, lower-income people. In return, They're trying to transfer, you know, transfer a certain amount of wealth income from higher net worth people, those over $1 million or less, $400,000 is sort of the cutoff right now, trying to transfer that over. So that's how they're paying for it. So I think in a normal year, I'd say there's not a chance in the world that this would go through, but this is not a normal year.

I think if it goes through, they're going to bump it to $1 million. Maybe they might have exemptions for farmland, but again, that's the law of unintended consequences. Let's say farmland is exempt. Well, then really wealthy people are going to say, "I'm going to start buying farmland." Exactly. Which is going to increase the— I'm going to increase the cost of your farmland. And you were hoping that you could buy that quarter section or half section that comes up, and suddenly somebody comes in and says, "Hey, I'm going to you know, spend an extra $2,000 or $3,000 an acre because I know that I can 1031 from my— from this property into this property.

And also, you know, on this STEP Act where we have that transfer act, you know, that's really one of the law of unintended consequences here because what it says is if you transfer this property to your heirs and they're going to continue to farm that property, you're not going to owe that tax. But it's not free. What it says is if you ever stop farming it, then you're going to owe the tax. Now, will that be forever? Likely. Maybe it's for the next 10 years because that's what we have a rule now that says we have a favorable tax treatment for estate taxes if the family owns it and so on for at least 10 years. So again, are wealthy people going to say, hey, I right now I'm cash renting my ground to Chris Barron or to Paul Niefer whoever it is, for $300 an acre or whatever it might be.

Well, I know that if I do that and then I transfer, I pass away, and that land that now has got a $10 million built-in gain, it's going to go to my heirs. They're going to owe 50% in capital gains taxes. But if I simply start custom farming that land and then make sure my kids custom farm it for the next 10 years, that built-in gain or that tax is going to disappear and potentially I'll get that built-in gain. Not sure on that, but at least we're not going to be paying the transfer tax. So farm families that think this is really a great deal because, hey, we're not going to owe that tax, well, that may be true if the family farms it. But if you want to go out and acquire more ground that you're actually going to rent and control, that might not happen.

You might simply be able to go out and, you know, be the custom operator for that farm, but you're not getting any benefits of the appreciation in land or the appreciation in crop prices like we're getting now. You're basically just doing a job for that person. So, you know, that's something you and I have discussed a little bit offline and And I think that may be a much bigger deal than we're thinking of, you know, at first blush.

Narrator: This is Alyssa with the Ag View Solutions team. Here at Ag View Solutions, we work with farms and ag businesses all across the country on cost of production, business decision-making, collaboration opportunities, farm and ag business structuring, and transition planning. We work with operations of all sizes to help you with the important decisions that need to be made in your business. If you have questions or would like to learn more about how we can help your farm and business, please email us at cbarron@agviewsolutions.com. And thank you for listening.

Chris

Barron: Yeah, those are all like, you know, like asking the unintended consequences is the problem is thinking through these things. And the difficulty is figuring out, you know, we need a lot of these things. Like we talked about the infrastructure bill the last time, there's a whole bunch of stuff in there we need. We need to pay for it, and we all agree we need to pay for it until we're the ones that have to pay for it, you know. And it's deciding, okay, well, what, you know, how is, how is the money being spent? Is it being spent intelligently? Um, are we as taxpayers, you know, being represented the way that, that's fair? And, and I don't think most people have a problem with with, um, you know, paying the tax as long as on the other side of things, you know, we're, we're doing it the right way. And I'm not sure that, you know, a lot of it's just difficult.

This, like you said in the last podcast, you know, it's a, it's a redistribution of wealth. It's taken it from, you know, the quote-unquote wealthy, and I'm not sure how you define that, and giving it to those who don't have as much. And I'm not sure that's worked in a lot of cases and somebody has to pay for that. So what other—

Paul

Neiffer: Well, well, and you know, they actually tried this back in the late '70s, early '80s, I think it was late '70s where you would not have step-up in basis, but it was hard. Okay, what did grandpa pay for this land 50, 60 years ago? Well, the proposal that we've heard in the step back and I think President Biden's plan would have the same, is, well, if you don't know what the basis is, we're going to allow you to take what is the sales price or what's the fair market value, and we're going to let you discount it back 30 or 40 or 50 years and come up with a, quote, fake purchase price. So they've thought of that. You know, people are going to say, well, we don't know what grandpa paid for it. Well, we don't care.

We're going to simply say we're going to take an inflation factor And if you go back 30 or 40 years, if it's worth $10 million now, you go back 40 years with the inflation we had back in the '80s, it's going to be worth about $1 million. So you're going to owe tax on $9 million. So it probably behooves you to find that cost basis because I'm guessing that cost might be better than not. So, you know, like I say, Chris, we don't know. Not all of this is going to pass. This has been presented by the president, essentially the Congress. Congress now is going to get together and they're going to start writing the bills. We've already seen the Step Back, you know, that's really going to be incorporated into this bill, not 100% exactly, but pretty close. You know, we have Bernie Sanders' 99— the other 99.5% Act that came out.

There's a lot of restrictions on estate taxes in there, or trusts and estates in there. You know, they didn't mention that in the American Family Plan, but we know that they want to drop the age that you qualify for Medicare down to 60 or 55. And in order to pay for that, that's probably when they're going to drop the estate exemption down to $1 million. So we're starting to hear $1 million now. That million number is— it seems like that's the number that they, they think you're wealthy if you got $1 million.

Chris

Barron: Yeah, and that's the hard part. I mean, for farmers I mean, it like— and we, we talked about this in the last podcast, and it's not to fearmonger or whatever, but it, it literally would put, you know, implementing everything literally would put a lot of producers out of, out of business, at least long term, and being able to transition it over to the next generation like farmers have been doing.

Paul

Neiffer: Yeah, I think, yeah, I think really what's going to happen is if all these rules get implemented The incentives for the next generation to want to become a farmer is going to become a disincentive, you know, from a tax standpoint. Right. You know, currently there is an incentive from a tax standpoint to continue to be a farmer for that next generation. There's certain benefits built into the tax code on a transfer to the next generation, and under this rule that's all going to disappear. You're going to potentially owe a tax. Or if you farm and the rule says if you stop farming, you're going to owe the tax plus interest, they're not going to be very happy about that either. So, again, we still need to see what are all the rules. This is just a plan. And it's— they talk about the elimination of the step-up. And again, it's not elimination of the step-up.

You have to pay a tax to get the step-up. That's what I— want to get across. But that was only like 3 sentences in the plan, so we just don't have a lot of details yet.

Chris

Barron: And, you know, to bring up kind of another side topic, but it's kind of connected, is like, you know, the Bill Gateses of the world, you know, that, you know, he's the largest farmland owner. Um, those types of policies would drive the benefit more toward those big landowners because they could, like you said, they could just have everything custom farmed or whatever. And all of a sudden, as producers, we become, you know, just custom operators as opposed to being able to farm on our own. That's the threat that kind of scares me, I guess.

Paul

Neiffer: Yeah, well, that's a good point. I mean, Bill Gates, Warren Buffett, they've already— I mean, Gates already has his private foundation. I think upon, you know, the later of his wife or his death, all of his remaining assets are going to go into that private foundation. Uh, all that's going to escape an estate tax. It escapes the transfer tax. So what I call the wealthy people, you know, those are $50, $100, $200, $300, a billion. They're not going to be subject to this tax. They're simply going to have some type of a private foundation, assets are going to go in there, their kids and their heirs are going to work for the private foundation. That happens right now for all these private foundations. And as long as they distribute 5% of the assets each year, you know, they're not going to owe anything.

So, and some people, I remember I wrote that, I think in a blog post a while back, and somebody had mentioned, well, rich people don't do that right now. And I'm like, Yes, they do. And if this law goes through, you're going to see a whole lot more of it. It's like back in— yeah, it's back when we had the tax reform where we had the cooperative deduction where it was 20% of the gross. Everybody was going to be a cooperative. Well, wealthy people, if this all goes through, they're going to be creating private foundations even more than they are now. So, uh, it'll be interesting. I mean, I have told you this, I think, a couple times, and I'll reinforce it. I got plenty of things to write about on my blog right now about this stuff. So, uh, yeah, I'm not losing any material, that's for sure.

Chris

Barron: Yeah. So let me ask you the, the most tough question here at the end, and I'm not throwing you under the bus, but, um, what's the answer then? You know, we do have to pay taxes, we do have to pay for this stuff. What, what do we do then? What, what's the— is there a solution?

Paul

Neiffer: I, I think the answer is don't panic. I think, you know, this is— nothing's permanent. You know, they talk about it being permanent, that what will happen. Now, if somebody gets caught in this, obviously, you know, there's things that you can't control there. But, you know, potentially 2 years, 4 years, 6 years, 8 years from now, a lot of these rules, if they aren't popular, if they don't work the way they were designed, will be changed. The other thing is instead of waiting to get step-up during, you know, at death, we may start doing more and more transfers during lifetime so that we eliminate that appreciation, eliminate that tax. So, there will always be steps that we can take. I'm not going to hazard a guess as to exactly what those steps are right now because yet we still don't know what the bill actually is. But, you know, there'll be things that we can do.

Chris

Barron: Yeah, well, when there's rules, there's always ways to figure out how to manage them too, I guess, is what you're saying.

Paul

Neiffer: And I can tell you, plus I can tell you the one industry that loves this, and I probably shouldn't use the word loves this, but is really excited about this, is the life insurance industry. You know, for the last 15 years, nobody really bought life insurance to pay estate taxes or transfer taxes. This is a case where you might start actually really looking at doing life insurance just to cover the transfer tax that your kids are going to owe. Mm-hmm.

Chris

Barron: Well, and we always advocate that.

Paul

Neiffer: In a lot of unintended consequences. Yeah, right. What was that, Chris?

Chris

Barron: Well, we always advocate that with our clients that we're working with on transition and business development and multi-generational operations is making sure that there's ample, at least term life, you know, during that window of, of, you know, when, when there's a lot of dollars that, that, you know, if there's multiple people farming together and one person's out of the picture all of a sudden, how do you, how do you manage the, the tax consequences and the debt? Because usually there's debt connected with that, and that's, that's the hard thing too. You can have something that's worth $3 million, but what if you, what if you, you know, half of it's debt too? I mean, that's the hard part.

Paul

Neiffer: Yeah. And that key man, I call it key man life insurance that you need in that operation. Again, term really makes a lot of sense. But if you're talking about something that really your liquidity event is only going to be triggered upon the second to die, not the husband, and not the wife, so then you can take advantage of the lower rates for a second to die type policy. Have that in what we call an irrevocable life insurance trust, an ILIT. You take and put that life insurance into that trust because what a lot of farmers don't understand, you know, they've been— I'm going to use the word sold— a lot of life insurance over the last 30 years because the life insurance agent shows up and they'll buy $100,000 or $500,000 of permanent insurance. I've seen a lot of that.

They don't realize that that death value, not the cash value, but the death value is actually part of their estate. So we want to make sure we get that transferred over into a life insurance trust so we can keep it out of the estate. And there's nothing in this bill that prevents us from doing that. And I don't think there's going to be. Yeah, I think that's one thing that they probably won't change. So, but I think the key is, Chris, you know, we'll keep your audience posted on on this, on how this proceeds. You know, likely they're going to try to push this through by, I'm guessing, Labor Day. They'll say that, but you know, it may be toward the end of the year. But I think they're really going to try to push it through, like I say, probably by Labor Day, maybe a little bit after that. They know they can't go beyond the end of the year because what's next year? It's an election year.

Yep. So yeah, yeah. So, and, and they already know, you know, they've already Basically, with redistricting and with the census and the fact that most of the state legislatures are still controlled by the Republicans, I guess if we want to go into politics, you know, and normally when we have a midterm election, you know, it always flip-flops the other way by 20 to 30 seats. So, you know, next year, likely the Democrats are going to go from being 6, 7, 8 in power, you know, extra seats, to being 10, 15, 20 behind. So we will just see what happens.

Chris

Barron: Yeah, it will be interesting to say the least, and we'll have to keep an eye on this. Are you going to DC to see what's going on?

Paul

Neiffer: Yeah, actually, yeah, my, my, um, my partner Chris Hesse and I were actually making a trip to DC right after tax season, uh, May I think we're there May 19th through the 21st. We're going to be meeting with various farm groups and some possibly politicians just to go through, like I say, the law of unintended consequences. So hopefully we can, you know, make a difference. I'm not sure if we will, but we're going to give it a try.

Chris

Barron: Okay. Well, hey, we really appreciate all you're doing and keeping us informed along the way. And anything else I didn't bring up or that you need to mention on this?

Paul

Neiffer: I think, I think we did a good job of covering the pertinent details, at least for now.

Chris

Barron: For now. Yep. All right, well, hey, uh, good information on the American Families Plan, and appreciate you updating us on kind of where we're at to this point in time, and, uh, really appreciate it. Thanks a lot, Paul.

Paul

Neiffer: You're welcome. Thanks, Chris.

Chris

Barron: You bet. That's Paul Niefer, thefarmcpatoday.com. Make sure you check out his blog and Again, thanks everybody for listening. We'll try to keep you updated as, as some of these things develop. And again, we'll be back next time on the Ag View Pitch.