California farmers play a critical role in the American economy; agricultural exports from California totaled $21.7 billion in 2019. (1) As many potential tax changes may be coming on the horizon, now is a critical time for California farmers to evaluate their financial strategies and take advantage of potential tax savings opportunities. News headlines have highlighted the recent exodus of businesses from California, (2) but farmers can’t move as readily as other types of businesses (if relocation is even possible at all).
Tax Law Changes In 2021
Farmers should be aware of tax law changes that could affect their long-term financial picture. In 2020, the California state legislature passed Assembly Bill 85, which suspended the ability to claim a net operating loss through 2022 and placed a $5 million cap on tax credits. (3) On the federal level, the Biden administration has proposed a number of potential tax law changes as well. Farmers earning more than $400,000 would likely be most affected under the proposed plan. The top rate for capital gains tax could increase to 39.6% (currently the maximum is 20%) and the step-up in basis for inherited assets could be eliminated, meaning that heirs would then be liable for the taxed capital gains on their inherited property prior to the death of the original owner.
Optimizing Investments For Tax Savings
Tax-friendly investment options are often overlooked. For some investors, we will recommend including municipal bonds and annuities in the asset mix, partly because the interest earnings on certain types of investments are not subject to taxation. In the right cases, we sometimes find that it is worth accepting lower rates of return in exchange for the tax benefits. Retirement accounts such as a 401(k) or IRA may benefit from a Roth conversion while tax rates are low. Tax-deferred investments can often result in a much higher tax bill not only because tax rates have increased, but also because the growth on your retirement is taxed as ordinary income. HSAs are also critical for tax savings, and we usually advise our clients to maximize their HSA contributions when possible.
How We Can Help
As a California-based business, we have felt firsthand the tax changes that have impacted our communities. Having grown up in an agricultural community myself, I developed a great appreciation for just how critical a role California’s farmers play in the economy. We love working with farmers and helping to preserve the wealth and legacy of agriculture, and working with a financial professional is the single most important component of building a strong foundation for a farm business. If you want to discuss how we can help you take advantage of all available tax planning opportunities for your California farm, reach out to us at 559-440-6999 or by email at matt@nfstrategies.com to set up a consultation.
About Matt
T. Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.
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(1) https://www.cdfa.ca.gov/Statistics/
(3) https://www.pillsburylaw.com/en/news-and-insights/NOL-tax-credits-ab-85.html