Tax-Reform and the Housing Market.

[retire@40]

I have friends that had to sell the family farm (4 generations or more) because they could not pay the estate tax on it.

That problem is a result of the current tax system not having common sense built into the law. An easy change could be made to the tax laws either exempting farms from the estate tax or at least lowering the tax burden on farms.

This is a classic case that proves the power to tax is the power to destroy.

Taxation based on total asset valuation is a major problem, and the problem gets worse as the assets become more non-liquid.

 

[HFWR]

I suppose we could (and do) argue ad nauseum about taxes and spending...

But in the end, we need to pay for what we spend, so if the government, and the "people", by extension, decide to spend $X trillion, then the revenue HAS to match. End of story, IMHO... 

 

[Danny]

Well, I'm going to go out on a shaky limb here...I'm going to say it anyway, because that's the kind of gut I got.
I say we can raise more revenue and balance the books by having an entrance fee into the US for non-citizens kind of like DisneyLand. Also, tax the Canadians for their use of our culture.

 

[brewer12345]

Also, tax the Canadians for their use of our culture. 

Careful, you might give them the idea to sue us for the effects our culture has on them. Kind of like dumping toxic waste on your neighbor's lawn.

 

[youbet]

"That problem is a result of the current tax system not having common sense built into the law.  An easy change could be made to the tax laws either exempting farms from the estate tax or at least lowering the tax burden on farms"

I also have a sentimental feeling towards the agriculturnal industry and have close personal friends who, years ago, struggled paying estate taxes on the family farm when it passed from one generation to the next.  Still, it seems unfair to single out family farms for special treatment vs. other capital intensive family businesses.  I'd have to say that all family businesses get an estate tax break, not just those involving crops or animals.

 

[work4beer]

Why should farms be treated differently than any other business? No family farm has been lost to the estate tax. It's a big myth. Families that don't want to lose the family business can either:

1) borrow money to pay the taxes. Why farmers' kids should be guaranteed a business without any debt load makes no sense.

2) buy a life insurance policy to pay the taxes. This is what my grandfather, a farmer, is doing.

Why a certain class of people should be allowed to pass huge capital gains from generation to generation, that are never taxed, makes no sense to me unless you think the US should be more like El Salvador.

And I say this as someone who will inherit (a long time from now, hopefully) a substantial portion of farmland from a family farm.

 

[tozz]

We all have such short memories.

The elimination of the estate tax has been on the GOP agenda for decades.  But there is a process that must be followed.  First you change the language:  call it the "death tax" rather than estate tax.  Then you make sure that everyone's daily talking points (politicians and aligned "journalists") include references to elimination of the "death tax."  Spurred by media outlets which quickly adopt the term, "death tax" becomes part of the national lexicon.  You hold hearings which highlight instances where poor farmers lose the family farm because of the death tax (later shown to be a relatively rare occurence, but nevertheless something that could be easily resolved by tweaking the statute).  

The tax is suspended.  The wealthiest 1% of the nation solidifies its hold on 90% of the assets, ensuring that their progeny will continue to own the country.  They coddle the obsessive guns, gays, and god crowd (who they secretly abhor), in order to maintain control.  And much to their astonishment:  it works!

I've always wondered about this.  How did this become such a knee-jerk political issue?  I know a number of people who don't even have enough net worth to be affected by the inheritance tax debate, but they get positively passionate about how it should be eliminated.

 

[brewer12345]

What is even funnier is that the estate tax has been abolished and reinstated like a dozen times in the nation's history. If they do succeed in getting rid of the tax, it will be back.

 

[ziggy29]

What is even funnier is that the estate tax has been abolished and reinstated like a dozen times in the nation's history. If they do succeed in getting rid of the tax, it will be back.

Pretty much all tax policy is like this, and I think it's silly. They should pick one tax rate and set of tax laws and be done with it for the most part. I have to think there's an economic cost -- to individuals, to businesses, to government itself -- associated with the uncertainty people have about future tax laws and how it affects their financial decision making.

I think a lot of suboptimal financial decisions are made because of what the government *might* do to change the tax code.

 

[SteveR]

What else do you expect from a bunch of political lawyers? (Martha excluded). They are in the business of gathering more power for themselves and keeping it through re-election. That means making the average voter want to vote for them through being on the side of the poor taxpayer. They will make everything better by changing the law. Well, they do and they keep doing it and then others come behind them and do it again to "correct" the problems in the law. This goes on in every aspect of law and legislation. Our founding fathers would be appalled with our current system.

 

[maddythebeagle]

Why should farms be treated differently than any other business? No family farm has been lost to the estate tax. It's a big myth. Families that don't want to lose the family business can either:

1) borrow money to pay the taxes. Why farmers' kids should be guaranteed a business without any debt load makes no sense.

2) buy a life insurance policy to pay the taxes. This is what my grandfather, a farmer, is doing.

Why a certain class of people should be allowed to pass huge capital gains from generation to generation, that are never taxed, makes no sense to me unless you think the US should be more like El Salvador.

And I say this as someone who will inherit (a long time from now, hopefully) a substantial portion of farmland from a family farm.

This makes sense. I live in a rural area but am now 2 generations removed from dairy farming. From what I hear, most people arent inheriting entire farms. Most people have multiple kids so giving an entire farm to one isnt going to happen besides what are the parents going to live on? It is more likely that the farm is sold (usually at a good price) to one of the kids well before the parent dies (most people dont farm latter into their lives).

 

[justin]

Whatever happened to the good ole days when you sold the farm to a developer who put up million dollar homes on 0.06 acre subdivided lots?

 

[Michael]

Our founding fathers would be appalled with our current system.

That's why they forbade a national income tax in the original Constitution. Alas, they had a better idea in 1916, and we are still suffering the fallout.

 

[Gone4Good]

An easy change could be made to the tax laws either exempting farms from the estate tax or at least lowering the tax burden on farms.

What about the family dry cleaner? Or liquor store? Or construction business? Or deli? Or . . .

I've always wondered about this. How did this become such a knee-jerk political issue? I know a number of people who don't even have enough net worth to be affected by the inheritance tax debate, but they get positively passionate about how it should be eliminated.

I think the reason that this tax irritates people is because it is patently, and understandably, unfair. I know we've somehow defined "fairness" in this country to mean punishing some people for the benefit of others but it is pretty easy for most to understand that someone's estate is the accumulation of income that has already been taxed once or twice or . . . The concept of having to sell a family business, or house, to pay taxes on property that has already been taxed once is appalling to many people.

Personally, I could really care less. I'd much rather pay fewer taxes now in exchange for an estate tax when I die. More likely, though, I'll pay more taxes while I'm alive AND more taxes after I die.

 

[Martha]

Why should farms be treated differently than any other business? No family farm has been lost to the estate tax. It's a big myth. Families that don't want to lose the family business can either:

1) borrow money to pay the taxes. Why farmers' kids should be guaranteed a business without any debt load makes no sense.

2) buy a life insurance policy to pay the taxes. This is what my grandfather, a farmer, is doing.

Why a certain class of people should be allowed to pass huge capital gains from generation to generation, that are never taxed, makes no sense to me unless you think the US should be more like El Salvador.

And I say this as someone who will inherit (a long time from now, hopefully) a substantial portion of farmland from a family farm.

Good post. There are also options to stretch out payment of the tax over time.

People don't "lose" the farm due to estate taxes. It wasn't their farm. They just don't get it for free.

Farmers and small-business owners often fear that their heirs will have to sell the business to pay estate taxes. In reality, the probability of a forced sale solely to pay estate taxes is small for three reasons.

First, you can leave a substantial amount of property to your heirs free of estate taxes. All property left to your spouse is exempt from any estate taxes. In addition, a significant amount of property is exempt from tax, going up each year.

Second, the Internal Revenue Service allows a closely held family business to value land on the basis of its "current use" rather than on the standard "fair market value." Current use valuation of farmland usually can reduce the land value by 20 to 50 percent. This will, in turn, sharply reduce potential estate taxes.

Third, tax laws allow for delayed payment of federal estate taxes. These provisions can be useful for estates that experience shortages of liquid assets upon the death of the estate owner.

 

[SteveR]

People don't "lose" the farm due to estate taxes.  It wasn't their farm.  They just don't get it for free.  My basic problem with it is the tax itself. Why tax a business that has already been paying income and other taxes ever since it was started? This just seems like double and triple taxation.

First, you can leave a substantial amount of property to your heirs free of estate taxes. All property left to your spouse is exempt from any estate taxes.  In addition, a significant amount of property is exempt from tax, going up each year. Yes, but when the property passes to the kids it is all taxable unless you have done some fancy trust work ahead of time. A large farm or established business could result in a very large tax bill and if the kids have no cash reserves, they are going to have to pay a bunch to keep it.

Second, the Internal Revenue Service allows a closely held family business to value land on the basis of its "current use" rather than on the standard "fair market value." Current use valuation of farmland usually can reduce the land value by 20 to 50 percent. This will, in turn, sharply reduce potential estate taxes. What about a business that has little or no land with it? Is the value of that business reduced too?

Third, tax laws allow for delayed payment of federal estate taxes. These provisions can be useful for estates that experience shortages of liquid assets upon the death of the estate owner. Again, I think the tax is just another way of stealing from hard working people that should be able to pass a family business to the next generation without taxation. It is just another form of government intervention into our lives and confiscatory practices of taking from the well off and giving to those less willing or able to make a better wage.

 

[work4beer]

My basic problem with it is the tax itself. Why tax a business that has already been paying income and other taxes ever since it was started? This just seems like double and triple taxation.

Because, that business has not paid capital gains since it started. You buy farmland for $100/acre and when you die it's worth $20,000/acre. You used income to pay off the $100/acre, but you never paid a dime on the appreciation to $20,000 acre. Why should this remain untaxed anymore than someone who bought Microsoft at 50 cents a share?

Yes, but when the property passes to the kids it is all taxable unless you have done some fancy trust work ahead of time. A large farm or established business could result in a very large tax bill and if the kids have no cash reserves, they are going to have to pay a bunch to keep it.

Actually, the first $1.5 Million is tax-free. If the kids are going to run a business, they can take out a loan for the taxes. They're still buying a business at a substantial "discount" to someone off the street. This helps insure efficient allocation of capital.

Again, I think the tax is just another way of stealing from hard working people that should be able to pass a family business to the next generation without taxation. It is just another form of government intervention into our lives and confiscatory practices of taking from the well off and giving to those less willing or able to make a better wage.

The estate tax has its problems (I would prefer an inheritance tax instead), but it helps ensure the efficient allocation of capital. It also helps level the playing field and maintain social mobility. Which is important if you want to maintain a democracy and large middle class.

And I say all this as someone who would benefit greatly from the elimination of the estate tax.

 

[Martha]

Thanks for stepping in to respond, WW4B. With the amount exempt from tax and the fact that the tax rate is hardly 100%, it is pretty easy to get a loan to finance the taxes. Plus if I recall correctly, you can pay over 10 to 15 years to the IRS if you don't want outside financing.

The next generation gets a pretty good deal. And as I said before, I would rather pay the tax when I am dead than pay a higher rate now when I am alive.

 

[SteveR]

Thanks for stepping in to respond, WW4B.  With the amount exempt from tax and the fact that the tax rate is hardly 100%, it is pretty easy to get a loan to finance the taxes.  Plus if I recall correctly, you can pay over 10 to 15 years to the IRS if you don't want outside financing.

The next generation gets a pretty good deal.  And as I said before, I would rather pay the tax when I am dead than pay a higher rate now when I am alive. 

I agree that the assets are not taxed at 100%, this was an error on my previous post. I understand the taxes associated with estate transfers (filed estate tax returns for my fater and wife's estates). 45% tax rate after the $1.5 M exclusion for an individual, in my mind is excessive. Run FIRE calc. for your situation and see what the highest possible asset value might be sometime during the life of your investments. This is what will have to pass to a spouse and then to children or others that will be taxed. This is not the lottery where you "win" big on a small investment. Someone in your family earned this money through labor or through time valued investments. I just feel strongly that the Fed and state governments should have no rights to these assets.

I have established trusts and other instruments to minimize the "potential" tax hit to my kids in the future. I will not be paying the tax on their inheritance; they will. I won't get a cent from my family but I would like to pass something on to my kids or their kids without the government stealing 45%+ off the top before they get it. It is just my old fashioned way of seeing the fruits of my labor being kept in my own family.

Not trying to pick a fight, just venting because of the time, energy and cost to keep the taxman out of my kids wallets after I am gone.

 

[Gone4Good]

Actually, the first $1.5 Million is tax-free. 

Sounds like a lot but $1.5 million could very well represent a modest 2 bedroom manhattan apartment.

If the kids are going to run a business, they can take out a loan for the taxes. They're still buying a business at a substantial "discount" to someone off the street. This helps insure efficient allocation of capital.

What the hell does taxing the bejeezes out of someone have to do with the efficent allocation of capital? And why should children have to "buy" the family business?? Because they didn't earn it? Well the folks receiving transfer payments from the government didn't earn those either.

 

[sgeeeee]

What the hell does taxing the bejeezes out of someone have to do with the efficent allocation of capital?  . . .

I don't think you understood the points being made. If the inheritance is not taxed, the government has to tax more somewhere else - out of someone's earnings. If you believe that a meritrocracy is efficient, it seems ineficient to give someone a free ride on taxes simply because their parents were wealthy while placing excess tax on people who are working to earn money.

I realize you probably feel like both taxes should be cut and the government should just spend less.

 

[Gone4Good]

I realize you probably feel like both taxes should be cut and the government should just spend less.   

Yup - you're getting to know me

 

[Mr._johngalt]

I realize you probably feel like both taxes should be cut and the government should just spend less.   

Like the guy in the old joke about "smart pills", it seems like you're getting
smarter already.

JG

 

[Martha]

I understand that conservatives want less taxes. But first you will have to reduce your spending and pay for what you already bought. Again, I would rather address spending needs through an estate tax than a higher tax on wage earners.

One other point on the estate taxes. The increase in value over the basis in assets that are inherited get a stepped up basis. Thus this increase is never taxed except through the estate tax, and only to extent the value of the estate exceeds the unified credit. Therefore the point about double taxation isn't really correct.

 

[Martha]

Sounds like a lot but $1.5 million could very well represent a modest 2 bedroom manhattan apartment.

What the hell does taxing the bejeezes out of someone have to do with the efficent allocation of capital? And why should children have to "buy" the family business?? Because they didn't earn it? Well the folks receiving transfer payments from the government didn't earn those either.

A million five is a lot. A good number of frugal people on this web site have less. Who are the folks receiving the transfer payments? National defense contractors? Social security and medicare recipients? Federal highway projects? My niece's daughter that was born without enough intestine to live, who gets about $500 a month in SSI? My husband's former tenant who has hundreds of epilepic seizures a year, who gets the same in SSI?