It is a testament to how popular land conservation is across the political spectrum that Congress found time to expand favorable tax treatment for gifts of conservation easements as part of the last minute deal to avoid the fiscal cliff. After a year of uncertainty about the federal benefits for conservation, we are now sorting through the final details of this major tax legislation that passed on January 1st. Here are some highlights of what we know so far:
Conservation Donors Win Additional Tax Benefits
Reduced limits on income tax benefits that will make conservation easement gifts much more attractive to donors have been made retroactive to the beginning of 2012 and extended through the end of 2013. Instead of deductions being limited to 30% of the donor’s Adjusted Gross Income (AGI), a donor of a conservation easement can now deduct the value of the conservation donation from their taxable income at a rate of up to 50% of their AGI or 100% if the donor is a qualified farmer or rancher. And, instead of carrying forward unused deductions from the year of the gift for 5 additional years, donors now have 15 years to use up their deductions. This is a very significant change for donors whose income is relatively small compared to the value of their conservation easement. It mainly helps middle-class families who in the past couldn’t use most of their deductions, but it can also help relatively wealthy landowners who give large gifts.
The Alternative Minimum Tax (AMT) was also “fixed” in the fiscal cliff deal. The amount of income exempt from AMT was raised and the exempt amount will be indexed for inflation in the future. We are still analyzing these complex provisions, but these fixes should decrease the number of conservation easement donors who find their deductions limited by AMT.
Eligibility for Estate Tax Benefits Restored for About Half the Land in the U.S.
Another uncertainty that is permanently removed is the provision that would have put geographical limits on the use of the §2031(c) exclusions by estates containing land with conservation easements. Section 2031(c) excludes up to $500,000 from taxation in estates that contain donated conservation easements. This is in addition to whatever value the conservation easement itself removed from the taxable estate and the exclusion continues forward to all future estates containing the land as long as the donating family owns the property. Use of the §2031(c) exclusion was scheduled to become unavailable to about half of the land in the United States in 2013, because of geographic requirements that the qualified conservation easements had to be within major metropolitan areas or near national parks and wilderness areas. The fiscal cliff deal removed those requirements and now all estates containing qualified conservation easements are eligible for the exclusion regardless of location.
Downsides for Conservation Gifts
The fiscal cliff deal was not all good news for conservation donors. Congress brought back limitations on all itemized deductions that take away deductions like those created by conservation easement gifts as the income of the donor rises. This provision can take away up to 80% of otherwise eligible deductions for very high income individuals and families. Starting with individuals making $250,000 and couples making $300,000, deductions are reduced by 3% of the income over these thresholds. For example, a couple making $500,000 in the year they make a gift of a conservation easement worth $100,000 would lose $6,000 of their gift ($500,000 – $300,000 = $200,000; 3% of $200,000 = $6,000).
Future of Conservation Programs in Farm Bill Still Uncertain
The Farm Bill has been extend through the end of 2013 by the fiscal cliff deal, but the deal does not affect conservation programs that are part of the Farm Bill. The Farm and Ranch Protection Program (FRPP) had already been extended and the expired Grassland Reserve and Wetlands Reserve Programs were not part of the deal. We will have to wait a few more months to find out the fate of these crucial conservation funding programs.