Schedule J - Income Averaging for Farmers & Fishermen

           A very special election is available to farmers and fishermen on their income tax returns.  A farmer or fisherman can choose to average a portion of their 2007 farming or fishing income over three years.  In order to do this, the farmer or fisherman would need to complete Schedule J - Income Averaging for Farmers and Fishermen with their Form 1040.

           Using Schedule J, the elected farming or fishing income gets allocated to the three previous years at one-third for each year.  The tax amount for the current filing year would be the tax liability computed without the elected farm or fishing income in addition to any increases in the tax liability for those three prior years as a result of including allocated elected farming or fishing income.  The option of income averaging is not available to estates or trusts involved in the farming or fishing business, but rather exclusively to individual farmers or fishermen.

           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.       

                If you are looking for a CPA or Accounting Firm to assist you with your income tax reporting, bookkeeping, financial planning, or general accounting needs, then you have come to the right place!  Try out the CPA Search feature on this website to find a qualified professional in your area.