Updated: Jul 9, 2020
By Kelly Nuckolls
This is not a substitute for legal or financial advice. See here for the site’s reposting policy.
Two big tax law changes were passed in the last few weeks. One is the change to the federal tax law’s deduction for qualified cooperative dividends, which I wrote about last month. The other is at the state level, amending Maryland’s estate tax exemption amount.
The deduction for qualified cooperative dividends, passed in the federal Tax Cuts and Jobs Act, was a major incentive for selling agricultural commodities to a cooperative you were a member of, compared to selling the products to a non-cooperative. Congress changed this deduction in their recent budget bill, and made it retroactive. A new cooperative deduction will be the law for all of 2018 through 2025. The new deduction for cooperative members’ sales could still be an advantage for some farmers, but for many, it is now equal to or even less than the deduction for selling to a non-cooperative. Discuss the new cooperative deduction with your accountant to determine whether or not it is a greater tax savings than the non-cooperative sales deduction.
The new cooperative deduction is very complex. Any non-corporation farm cooperative member can deduct their sales to a cooperative equal to 20 percent of their net income from the sale minus smallest of either: 1) 9 percent of the net income from the cooperative sale or 2) 50 percent of the W-2 wages paid that contributed to the cooperative sale. However, nothing needs to be subtracted from the 20% of net income calculation if no W-2 wages were paid during the tax year. Then, cooperative members can add to the deduction an additional amount equal to any pass-through deduction they receive from the cooperative for its qualified production activities income related to that member’s product. Again, this deduction is not simple, and a tax expert should be consulted to determine how this deduction might apply to your farm operation.
Maryland’s estate tax only applies to estates worth more than a set exemption amount, which recently changed. The federal estate tax exemption amount increased in 2018, from around $5 million per individual and $11 million per married couple to $11.2 million per individual and $22.4 million per married couple. For 2019, the Maryland estate tax exemption amount was going to be the same as federal law. After the federal estate tax exemption amount changed at the end of 2017, the Maryland legislature passed a bill changing the state’s exemption amount. Now the Maryland estate tax exemption amount for 2019 and beyond will be $5 million per individual. The new Maryland law also adds a spousal unused exclusion amount for married couples, potentially doubling their exemption amount to $10 million.
Under the new law in Maryland, beginning in 2019, a spouse can claim a predeceased spouse’s unused estate tax exemption amount if either : 1) the predeceased spouse died on or after January 1, 2019, and a Maryland estate tax return is timely filed for the predeceased spouse, and the other spouse elects to use the unused amount; or 2) if the predeceased spouse died before January 1, 2019, or was not a Maryland resident, and an election was made on the federal estate tax return to use the predeceased spouse’s unused exclusion amount. Overall, if one spouse passes away in Maryland, the other spouse must elect to use the deceased spouse’s unused estate tax exemption amount on the state’s estate tax return to double the couple’s total exemption amount to up to $10 million.
If you have questions on how these two new tax changes will impact your farm operation, you should consult an accountant.