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January 21, 2007 - I've learned our family will be subject to the Kiddie Tax with a recent change in law. Can you explain the Kiddie Tax and the implication of this law change?

The donor of a conservation easement earns two tax benefits: a federal charitable deduction for the easement's value and Colorado tax credits which may be used to offset Colorado State income tax or sold to other Colorado taxpayers.

Last year both Congress and the Colorado legislature enacted significant changes regarding the tax incentives for conservation easement donations. Some of the changes were effective immediately and are currently set to expire at the end of 2007, providing an important but potentially limited opportunity for landowners.

The changes offer a major opportunity for landowners to realize tax benefits and protect the conservation values on their land. Below is a summary of the federal law changes followed by the modifications to the Colorado credit program:

Individuals. The new law raises the amount an individual taxpayer may claim as an income tax deduction available for qualified conservation contributions from 30% to 50% of adjusted gross income (AGI). Additionally, the allowable time individuals may carryforward the qualified conservation contribution in excess of the new 50% of AGI limitation was increased to 15 years. Previously, the 30% AGI limitation allowed a carryforward for 5 years.

Qualified farmers or ranchers may deduct the conservation easement value up to 100% of their AGI, with the same 15 year carryforward period for donations satisfying a set of requirements.

Corporations. Previously, corporations faced a limitation of up to 10% of their taxable income for qualified conservation contributions. The new law allows corporations earning more than 50% of income from the business of farming to deduct up to 100% of taxable income, with a 15 year carryforward period, for a qualified agricultural conservation easement.

Effective date. The increased incentives apply to qualified conservation easements donated from January 1, 2006, through December 31, 2007. Unless Congress votes to extend the provisions before they expire on January 1, 2008, the federal income tax rules will revert to the old law limitations.

Appraisal Rules. While creating enhanced tax benefits for conservation easement donations, the new law tightened the oversight standards for appraisers who value the easement gifts and lowered the thresholds when penalties apply for substantial over valuations.

Colorado legislative changes. The Colorado legislature approved, and Governor Owens singed, a major change affecting the tax credit for conservation easements during the 2006 legislative session.

Colorado's conservation easement tax credit program has been in place for more than six years. Even though the tax credit program has helped conserve hundreds of thousands of acres in Colorado, the state's conservation community identified some areas where the tax credit could be improved. HB 06-1354 increased the maximum tax credit conservation easement donors could claim, and simplified the method used to calculate the value of the allowable tax credit.

Key provisions of the bill are as follows:

• The old structure limited the tax credit up to a maximum total credit of $260,000. The credit was computed in a two-tier formula which limited the credit to $100,000, plus 40% of the easement's value over $100,000. The practical effect was to cap the value of tax deductible conservation easement donations at $500,000.

• The new law created a single-rate structure which allows a conservation easement donor to claim up to 50% of the conservation easement value as a tax credit. The bill increases the maximum amount of the donation to $750,000, which results in a new maximum Colorado income tax credit of $375,000.

• Applies to conservation easement donations made beginning January 1, 2007.

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