Tax Q&A for 2014; healthcare, real estate, drought
QUESTION: Our farming partnership only has three workers: My husband, myself and our son.
In the past, the farm has paid for all health insurance, but my husband has turned 65 and is on Medicare. Can the farm partnership continue to pay all health insurance premiums? Or should we offer a Section 105 reimbursement plan so that we can pay insurance and out-ofpocket expenses pre-tax?
ANSWER: Beginning in 2014, the Affordable Care Act (ACA) imposes mandates on employer-provided health care. But the rules can be different for insurance premiums and reimbursement of out-ofpocket costs. In general, employer reimbursement of individual health insurance premiums is no longer permissible. (It exposes the employer to a very substantial tax penalty for health plan years beginning in 2014.) Employers may only pay health insurance premiums for group plans that meet the ACA mandates.
However, on the assumption that your husband and son are partners in the partnership, special rules apply for their premiums. The partnership may continue to reimburse partner health insurance, and must report that reimbursement as a “guaranteed payment” that is taxable to the partner. The partner in turn claims a fully offsetting self-employed health insurance deduction on the front of the Form 1040.
The result is that the partnership has claimed a tax deduction for these premium payments. Because these amounts are initially taxed to each partner, they do not violate the new ACA mandates. Medicare premiums may also be treated as employer-provided health insurance for these rules.
But out-of-pocket reimbursement plans under Section 105 are a different matter. Those are only permitted in two narrow circumstances going forward—the business has only one employee, or the Section 105 plan is limited to reimbursements of ancillary benefits such as dental, vision and longterm care costs. It may be that a one-employee plan fits for you. If your husband and son are partners and you are an employee, the partnership could provide a one-participant 105 plan to you. But if you are all partners in the partnership, that option does not exist.
QUESTION: I have real estate that I would like to direct specifically to my various beneficiaries. I think the way to do this is to add their name to the title for the particular parcel and indicate they have rights to survivorship. This way the property would pass with clear title to an heir with little legal proceeding. If I do this, does the property get the stepup in basis at my death?
ANSWER: The form of title that you are considering simply directs the property to a named individual by title rather than by will or trust. It can be, as you suggest, an efficient way to pass property directly to a specific heir. But it has no impact on your estate. You still own and control the property until your death, and presumably retained all income from the property.
Those features mean that the asset is still part of your taxable estate (even though not part of your probate estate) and receives a full step-up in basis to fair market value at the time of your death. Accordingly, if your heirs subsequently sell the property, their tax basis looks to the fair market value at the date of your death.
The step-up in basis rules apply any time property is included in an estate, even if it is pulled back into the estate by a special rule of law. For example, if an individual changes title to an asset to an heir, but that individual retains all of the income or use of the property during their lifetime, there is a special provision that includes the asset within their estate (Internal Revenue Code Section 2036).
Those assets receive a stepup in basis because of their inclusion within the estate.
QUESTION: I would like to know if there are any considerations for deferring taxes on cattle that were sold in 2013 due to drought in south Texas. We normally would hold them longer and the sale would not have occurred until 2014.
ANSWER: The IRS issues an annual notice that identifies the areas that had extended drought and for which special tax deferral privileges apply. IRS Notice 2013-62 contains the list of counties for which special drought relief applies. The list includes a large number of counties in Texas, so presumably you are eligible.
There are actually two deferral provisions available. Under Section 451(e), you are entitled to defer for one tax year the proceeds attributable to the excess number of animals sold early because of the drought conditions. That would defer until 2014 the proceeds from those animals sold early in 2013 due to the drought. Section 1033 of the tax code allows a more extended deferral, in which the gain is not currently reported, but rather rolled into replacement animals that you purchase within a four-year period (and that period is extended if you are in an area that has ongoing drought).
This second provision provides a longer deferral, but is limited to animals held for productive use for breeding or dairy, not simply those held for resale.
Because the income from the sale of raised breeding or dairy cattle generates capital gain, it may be beneficial to forego the deferral. If the deferral provision is not utilized, you’ll have capital gain today and ordinary deductions from depreciating the replacement cattle. — Andy Biebl, DTN Tax Columnist