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overview
Federal tax policies can have important effects on farm profitability,
the number and size of farms, the organizational structure of the
farm sector, and the mix of land, labor, and capital inputs used
in farming. The most important Federal taxes for farmers are the
income tax, the self-employment tax, and estate and gift taxes.
The research and analysis highlighted in this briefing room focuses
on how Federal tax policies and changes to such policies affect
farmers. An overview of the most important Federal tax provisions
and the tax burdens for farmers is provided. The implications of
major tax legislation such as the Economic Growth, the Jobs and
Growth Tax Relief Reconciliation Act of 2003 and Tax Relief Reconciliation
Act of 2001 are higlighted. A number of tax policy proposals of
significance to farmers are also analyzed. These include proposals
regarding Farm and Ranch Risk Management (FARRM) accounts and fundamental
tax reform. The importance of the earned income tax credit for farm
and rural taxpayers is also described.
contents
features
How Will the Phaseout of
Federal Estate Taxes Affect Farmers? Concern among policymakers
that the Federal estate tax might force the liquidation of some family
farms has resulted in the enactment of a variety of special provisions
over the years. Providing relief to farmers and other small business
owners was the primary impetus for the 1997 changes to Federal estate
and gift tax policies and a major objective of the 2001 law that will
phase out and eventually repeal the Federal estate tax. While only
about 4 percent of all farm estates owe Federal estate taxes, a much
larger percentage of farm estates must file an estate tax return,
make use of special farm provisions, alter their business practices,
or engage in costly estate planning in order to reduce the impact
of the estate tax on their farm businesses. Thus, the phaseout and
repeal of the Federal estate tax will affect a much broader group
of farmers than just those who owe taxes. AIB-751
"New Tax Law
Includes Savings for Farmers," (2001) The new law reduces
income and estate taxes for most taxpayers, including farmers. While
savings begin in 2001, many reductions are implemented gradually.
Over the next decade, farmers are expected to save about $19 billion
in Federal income taxes and $3 billion in Federal estate taxes.
The largest cut is an across-the-board reduction in marginal income
tax rates. Federal estate taxes will be reduced and eventually repealed.
However, all changes expire in 2011 without future action. AO (9/01)
How Changes in EITC
Affect Rural Recipients (1996) and
"Additional Farm Tax Relief Among New Tax Measures," (1999)
The EITC has become an important source of income support for
low-income rural workers and many farmers. The credit encourages
work, reduces the burden of social security and income taxes, and
provides a refund for some. Nearly one-fourth of the total credit
goes to rural areas, particularly in the rural South where poverty
is higher. About 20 percent of rural taxpayers and 13 percent of
farm households qualify, compared with 16 percent all taxpayers.
recommended readings
How Will the Phaseout
of Federal Estate Taxes Affect Farmers?, AIB No. 751-02, U.S.
Department of Agriculture, Economic Research Service, Feb. 2002.
Durst, R., J. Monke and D. Maxwell.
"Tax-Deferred
Savings Accounts For Farmers: A Potential Risk Management Tool,"
in Agricultural Outlook.
Current Farm and Ranch Risk Management (FARRM) account proposals
may not be an effective method of helping most farmers manage their
farm income variability.
The Taxpayer Relief
Act of 1997: Provisions for Farmers and Rural Communities.
New tax provisions reduce farmers' income taxes and make estates
easier to transfer across generations, but add complexity to the
tax system.
How Would
Fundamental Tax Reform Affect Farmers?
While compliance costs would be reduced, a revenue neutral, single
rate tax would likely shift the tax burden from high to middle and
lower income farmers.
Regionalism, Federalism, and
Taxation: A Food and Farm Perspective,
A model examining the economic effects of current tax policies and
comprehensive reform in different regions of the United States is
described and some tax reform scenarios are presented.
More readings on farm and rural taxes…
recent research developments
Effects of Federal Tax
Policy on Agriculture
This report analyzes the effects of the current Federal tax code on
farming. It is the first study that applies the ERS farm typology
to tax data. The study was initiated by the USDA National Commission
on Small Farms and also evaluates tax proposals to assist beginning
farmers. Investment, management, and production decisions in agriculture
continue to be influenced by Federal tax laws, although this influence
may be less than in earlier decades.
Farm and Ranch Risk Management (FARRM) Accounts.
FARRM accounts, a program of tax-deferred savings accounts for farmers,
is among the alternatives currently under consideration by Congress
to help farmers manage their year-to-year income variability. By
depositing income into such accounts during years of high net farm
income, farmers could build a fund to draw on during years with
abnormally low income. For a discussion on potential limitations
on the program's effectiveness, see FARRM
accounts and risk management, and
Accounts to manage farm income variability.
Important questions
and answers on issues of federal taxes.
related briefing rooms
Bankruptcies
Farm Financial Management
Farm Income and Costs
Farm Risk Management
Farm Structure
related links
Joint Committee on Taxation,
U.S. Congress
Nonpartisan analysis of legislative proposals, revenue estimates
of tax-related provisions, studies of various aspects of the Federal
tax system.
IRS Statistics
of Income
Data files summarize statistics about individual and business tax
returns filed with the IRS.
maps and images gallery
Farm Taxation at a Glance
These charts describe the types of taxes paid by farmers and provide
the most recent data available to us.
for more information, contact:
Ron Durst
web administration: webadmin@ers.usda.gov
page updated: August 17,
2004
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