Income Averaging for Farmers and Fishermen
Income averaging is a tax benefit available to individuals engaged in farming or fishing businesses. It allows taxpayers to average their farm income over a three-year period, potentially reducing their tax liability in years when income is unusually high.
Who Can Use Income Averaging?
- Individuals engaged in a farming business.
- Partners in a partnership involved in farming.
- Shareholders in an S corporation engaged in farming.
Services performed as an employee are not considered part of a farming business for this purpose. However, compensation received as a shareholder of an S corporation engaged in farming may be included if attributable to the farming business.
How Income Averaging Works
Income averaging allows farmers to use tax rates from the three prior years (base years) to calculate the tax on their current farm income. This can lower tax liability when farm income is higher than in previous years.
The calculation is done using Schedule J (Form 1040), which provides detailed instructions for determining the average tax based on prior-year rates.
Reporting Requirements
- Report farm income on Schedule F (Form 1040), Profit or Loss From Farming.
- Include gross income from farming, which includes:
- Income from Schedule F, line 9.
- Income from Form 4835, line 7 (Farm Rental Income and Expenses).
- Your share of gross farming income from partnerships, S corporations, estates, or trusts (reported on Schedule K-1).
- Self-employment tax must be reported on Schedule SE (Form 1040), with deductions attributable to farming included on Schedule 1, line 15.
Special Considerations
- Farmers and fishermen may have special rules for estimated tax payments. Use Form 1040-ES for estimated tax purposes.
- If you are a shareholder in an S corporation engaged in farming, report farming income as an item of information on Schedule E (Form 1040), Part V, line 42. Do not report it elsewhere on Form 1040 or 1040-SR.
Source:
Farmer's Tax Guide
Schedule J (Form 1040) - Income Averaging for Individuals with Income from Farming or Fishing
Schedule F (Form 1040) - Profit or Loss From Farming
Schedule K-1 (Form 1120-S) - Shareholder's Share of Income, Deductions, Credits, etc.
Disclaimer: Always verify details with the official IRS forms and instructions or your state Department of Revenue. OLT (Online Taxes) provides guidance based on retrieved context and does not guarantee accuracy for individual circumstances.