Note: A version of this article first appeared in the Winter 2021 issue of the Great Lakes Christmas Tree Journal.
Today, Joe Biden will be inaugurated as the United States’ 46th president. Democrats have retained control of the House of Representatives and have gained control of the Senate, due to winning the two Georgia run-off elections earlier this month.
Although coronavirus and the economy dominated much of the political discussion leading up to the election, both Trump and Biden released their tax policy proposals. Biden’s tax plan proposes to at least partially reverse some of the Trump tax cuts enacted in 2017. Biden’s plan means at least some individuals and businesses, including Christmas tree growers, will potentially pay more taxes in the coming years if his tax reform is enacted.
Biden will likely be able to enact his desired tax reform because Democrats control both the House and Senate. However, when it comes to politics and proposed legislation, anything can happen.
Let’s look at what Biden’s proposed tax plans could mean for Christmas tree growers’ taxes:
1) Increased Top Rate on Long-Term Capital Gains
Electing capital gain treatment is the single best way for most Christmas tree growers to lower their tax bill. Long-term capital gains are taxed at a maximum rate of 20%, while most Christmas tree growers likely pay 15%. These rates are much lower than the ordinary income tax rates, which currently peak at 37%.
The capital gain election for Christmas tree growers would remain, but Biden would increase the maximum rate on long-term capital gains from 20% to 39.6%, effectively removing the benefit of a capital gain election from high-income Christmas tree growers. However, this top rate would only apply to individuals with income over $1 million, so only the largest Christmas tree growers would be affected by this change.
2) Increased Top Rate on Ordinary Income
Ordinary income (income that does not qualify as long-term capital gains such as selling pre-cut trees from another farm, wreaths, and merchandise) is currently taxed at a maximum rate of 37%. Biden would increase this maximum rate from 37% to 39.6% for single taxpayers earning more than $520,000 and married taxpayers earning more than $620,000. Like the increased rate for long-term capital gains, only the largest Christmas tree growers or growers with other substantial income need be concerned with this possible change.
3) Elimination of the 20% Qualified Business Income Deduction
Christmas tree growers are currently eligible for a 20% deduction on their qualified business income (QBI). Although most growers should utilize the capital gain method to lower their taxes, not all do. For those growers who do not elect capital gain treatment, the 20% QBI deduction greatly reduces their taxes. Most growers cannot benefit from both the QBI deduction and the capital gain method.
Biden has proposed eliminating this deduction, but only for taxpayers with taxable income over $400,000. Similar to many of Biden’s other proposals, the elimination of the QBI deduction targets high-income business owners and would only affect Christmas tree growers with taxable income greater than $400,000.
4) Increased Corporate Tax Rate
Many Christmas tree growers do business as an LLC, partnership, S-corporation, or sole proprietorship. These growers pay the individual long-term capital gains and ordinary income tax rates discussed previously.
Growers who do business as a corporation are subject to a different set of tax rates, the corporate tax rates. Prior to Trump taking office, the corporate tax rate was 35%. The Tax Cuts and Jobs Act of 2017 lowered this rate to its current level of 21%. Biden would raise the corporate tax rate to 28%.
Biden’s proposal is a significant increase from the current corporate tax rates, but will likely affect only a select few Christmas tree growers who own their farms through a taxable corporation.
5) Increased Estate Tax
Currently, a 40% tax is owed upon death of an individual’s “taxable estate.” However, most individuals are not subject to the estate tax because of the large exemption. Currently, an individual only has a taxable estate if they own more than $11.58 million in assets ($23.16 million for a married couple).
Biden would decrease the exemption to $3.5 million ($7 million for a married couple) and increase the estate tax rate to 45%. An increased estate tax and decreased exemption amount will affect many more Christmas tree growers than the current estate tax law does. Growers who own significant assets close to or exceeding Biden’s proposed exemption amounts should consult with an estate planning attorney to determine possible steps to minimize future estate tax liability.
Some Good News
Although Biden has proposed many tax increases, his proposals are not all bad news. Biden has said that no one who earns under $400,000 will face a tax increase, which appears correct. Further, he plans to add and expand many individual tax credits, such the child and dependent care credit, an elderly relative caregiver credit, and a first time homebuyer credit. Many small Christmas tree growers with families will likely qualify for these credits to reduce their tax bills.
Conclusion
A Biden presidency will likely mean higher taxes for high-income Christmas tree growers or growers who use a taxable corporate entity. A grower who has income of less than $400,000 per year would likely not face increased taxes under the Biden administration and may qualify for additional tax credits.
Every grower who thinks he may be subject to higher taxes or may have a taxable estate upon death should consult with a knowledgeable tax professional for proactive tax planning. Regardless of income level, every grower should consider making a capital gain election because it is the best strategy for Christmas tree growers to save taxes that will likely not change with the Biden administration.
