Income Averaging for Farmers and Fisherman

Income averaging for individuals with income from farming or fishing allows taxpayers to reduce their tax liability in years of high income by averaging their taxable farming or fishing income over the previous three tax years (base years). This election is available for the 2025 tax year and is reported on Schedule J (Form 1040), which was renamed from “Income Averaging For Farmers and Fishermen” to “Income Averaging for Individuals With Income from Farming or Fishing” for 2025.

Eligibility and Election

• Taxpayers may elect to average all or part of their 2025 taxable income from farming or fishing over the prior three years (2022, 2023, and 2024).
• There is no requirement to have been actively engaged in farming or fishing during the base years.
• Filing status does not need to be consistent between the election year and base years.
• This election does not apply to the alternative minimum tax (AMT) calculated on Form 6251.

Elected Farm Income

• Elected farm income includes all income, gains, losses, and deductions attributable to farming or fishing activities. If both farming and fishing are conducted, they must be combined.
• Gain or loss from the sale of property regularly used in farming or fishing is included, provided the sale occurs within a reasonable time (presumed to be within one year) after cessation of the business.
• Excluded: income, gain, or loss from the sale of land, development rights, grazing rights, or similar rights.
• Elected farm income must be reported on Schedule J, line 2a, and cannot exceed total taxable income.
• Taxpayers may choose to include less than the full amount of farm income to optimize tax brackets across the four-year period.

Base Year Taxable Income Calculation

When a taxpayer did not use income averaging in prior years, they must complete worksheets to determine taxable income for each base year (2022, 2023, and 2024) for averaging purposes. These worksheets adjust for items such as net operating losses (NOLs), capital losses, and carryovers.

• 2023 Taxable Income Worksheet: Adjusts for NOLs, capital losses, and standard deduction to determine taxable income for averaging purposes.
• 2022 Taxable Income Worksheet: Accounts for NOL carrybacks and capital loss adjustments.
• 2024 Taxable Income Worksheet: Adjusts for NOL deductions and capital loss carryovers.

Important Notes

• The excess farm loss limitation rules are suspended for tax years beginning after 2017 and replaced by excess business loss limitations for years after 2020.
• At-risk and passive activity limits are applied before calculating excess business loss.
• Elected farm income is not affected by excess business loss allocations.

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Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.