The elected farming or fishing income is taxable income which is a result of a farming or fishing business. A fishing business is any business entailing successful or attempted catching, taking, or harvesting of fish. The Internal Revenue Service defines fish as finfish, mollusks, crustaceans, and any other types of marine animal and plant life except marine mammals and birds. To be considered a farming business, the enterprise normally involves cultivating land or harvesting or raising horticultural or agricultural items.
An important thing to remember when electing income averaging is the effect it may have on a taxpayer’s alternative minimum tax (AMT). On Form 6251 for the determination of alternative minimum tax, the regular tax liability of the farmer is computed without regard to averaging.
In order to calculate your elected farm income, you would first compute your taxable income from farming or fishing. This would include all income, gains, losses, and deductions derived from any farming or fishing business. To the extent that the one-half of self-employment tax deduction is related to your farming or fishing business, it would be included. Not included would be any gain from the sale or other disposition of land. Your income, gains, losses, and deductions from farming or fishing can be found as reported on various tax forms. Some of these tax forms are Schedule C, Schedule D, Schedule E, Schedule F, Form 4797, Form 4835, and Form 1040-line 7 for income received as a shareholder in an S corporation taking part in a farming or fishing business.
You are not required to elect to include your total taxable income. It is to your advantage to evaluate how your elected amount would affect your tax bracket for the prior three tax years, as well as for the current reporting year. The amount you determine for your elected farm income must not be greater than your taxable income.
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