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Federal Issues Affecting the U.S. Horse Industry



Editor’s Note:

This article is the fourth in our series relative to federal issues affecting the horse industry. This week’s article deals with the reduction in tax rates and the elimination of the estate tax. Tax issues are a major area of concern for owners as this article clearly points out.

Tax Rates Reduced - Estate Tax Eliminated

Introduction

The horse industry has long supported efforts to reduce personal tax rates and eliminate the estate tax and the American Horse Council has worked with other interests in Washington toward these goals.
Previously, the federal estate tax provided for a top rate of 55 percent. This rate often forced the heirs of a family owned business, like a horse farm, training facility or ranch, to sell land or other business assets in order to raise funds to pay the estate taxes.
Background

Bills were introduced in the last few Congresses to eliminate the so-called “death tax.” Some passed the House or Senate; some passed both houses; but none did both and survived a Presidential veto.

On March 15, 2001, the Senate Finance Committee held hearings to explore the ramifications of the estate tax. Other committees also held hearings. In addition, the Bush Administration pushed for a repeal of this tax in the President’s 2001 tax plan.

Congressional Action Finally, last summer Congress passed, and the President signed, the Economic Growth and Tax Relief Reconciliation Act of 2001. This bill reduced federal income tax rates and eliminated the estate tax. The top individual tax rate dropped to 38.6% in 2001-2003, to 37.6% in 2004-2005 and to 35% in 2006 and later. There were corresponding reductions in the lower tax rates.

The tax bill also raised the estate tax exemption to $1 million in 2002-2003, $1.5 million in 2004-2005, $2 million in 2006-2008 and $3.5 million in 2009 and thereafter.

The top estate and gift tax rate was also reduced from 55% to 45% over the 10 year period. The rate will drop to 50% in 2002, 49% in 2003, 48% in 2004, 47% in 2005, 46% in 2006, and 45% in 2007-2009.

Unfortunately, all of these reductions will be repealed automatically in 2010, unless Congress makes the changes permanent. Rates in effect prior to the changes will return at that time.

The 2001 tax bill also expanded the availability of qualified conservation easements by eliminating the requirement that the land be located within a certain distance from a metropolitan area, national park, wilderness area, or Urban National Forest. Thus, a qualified conservation easement may be claimed for any land that is located in the United States or its possessions.

The new law also increased the individual alternative minimum tax by $2,000 for single taxpayers and $4,000 for married taxpayers filing joint returns for 2001 through 2004.

AHC Position

Elimination of the estate tax was an important goal for the AHC.
The AHC will support any efforts to make permanent the favorable changes enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001.

Capitol Gains Tax - Holding Period Change for Horse Owners

Introduction

Gains from the sale of capital assets held for the required period qualify for a 20% capital gains tax, which is lower than the personal income tax. Capital assets include property used in a business or for the production of income.

Under the current tax code the holding period for capital gains tax treatment on all assets - except horses - is twelve months. In order to treat gain from the sale of a horse as capital gain, the horse must be held for twenty-four months. The horse industry has been trying to have the holding period for horses reduced to twelve months, the period enjoyed by every other business.

Background

The holding period for a horse normally begins when the horse is purchased and the title passes to the purchaser or, in the case of foals, when the horse is born. The holding period ends when the property is sold or otherwise transferred to a new owner.

Originally, the two-year holding period for horses was established as an anti-tax shelter provision. Since implementation of the holding period there have been changes in the passive loss limitations for horses that have greatly reduced the possibility of using the horse business as a tax shelter and make this discrepancy unfair.

Congressional Action

In the last Congress, legislation was introduced to make the holding period for horses twelve months, the same as other capital assets. This was included in the Senate version of the “Financial Freedom Act of 1999,” a major tax bill providing a 10% tax cut for all individual taxpayers. Unfortunately, during the conference committee between Senate and House Leadership, the provision shortening the capital gains holding period for horses was eliminated prior to the vote on the final package. Ultimately, this bill was vetoed by President Clinton.

Current Status

To date there have been no bills introduced in this Congress to reduce the capital gains holding period for horses.

Conclusion

The AHC supports a reduction in the holding period for horses in any tax bill that is passed by Congress this year. Passage of such a provision would rectify what the horse industry believes is the unfair treatment of horses under the Internal Revenue Code with respect to capital gains tax treatment.

Capital Gains Holding Period for Horses
Quick Facts

• Virtually all capital assets - except horses - qualify for the lower capital gains tax rate if held for twelve months. Horses must be held for twenty-four months to be eligible for the lowest rate.

• The two-year holding period for horses was established in 1969, since that time there have been many changes in both the horse industry and in federal tax laws.

• Changes in the passive loss limitations have almost done away with “tax shelters, “ the original purpose for establishing a longer holding period for horses.

• There is no reason to treat horses differently than other capital assets. There is no fair rationale to distinguish horses from other assets and discriminate against an industry that has an economic impact on the U.S. economy of $112 billion and supports 1.4 million jobs.

• Since implementation of the holding period, the horse industry has experienced economic stagnation, or even an economic downturn. Changes in the capital gain holding period would be helpful in providing a stimulus for the horse industry.

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