IRS Form 1040 Schedule J (2013): Farmers and Fishermen

What IRS Form 1040 Schedule J (2013) Is For

IRS Form 1040 Schedule J (2013) allows eligible taxpayers to use income averaging when their farming or fishing income rises sharply in a single year and pushes them into a higher tax bracket. The form helps spread a portion of current farm income or fishing income across earlier tax years so the income is taxed at lower tax rates. By averaging taxable income across multiple years, income averaging helps manage sudden increases in earnings associated with a farming or fishing business.

For more resources on IRS forms, including income averaging, visit the IRS Form Help Center.

When You’d Use IRS Form 1040 Schedule J (2013)

Taxpayers may use this election in situations where averaging income across tax years provides a meaningful reduction in tax liability.

1. High-income year compared to prior years: This situation applies when a spike in farm income or fishing income compared to previous years would otherwise cause a higher tax bracket in the election year.
   
   
2. You want to reduce your tax liability legally: This situation applies to individuals engaged in farming or fishing businesses who wish to utilize income averaging to distribute taxable income more evenly across applicable tax years.
   
   
3. Your elected income requires distribution across base years: This situation applies when the elected farm income must be allocated one-third across the three base years to produce a lower overall tax burden.
   
   
4. You had prior years with low actual taxable income: This situation applies when low actual taxable income in base years makes utilizing income averaging especially beneficial for farmers and fishing businesses.

Key Rules or Details for 2013 IRS Form 1040 Schedule J

Several core rules determine who may file Schedule J and how elected farm income must be calculated.

1. Eligible businesses: This rule explains that only individuals engaged in a farming or fishing business may file Schedule J, which includes activities tied to agricultural or horticultural commodities, plant life cultivation, leasing land under a written lease, and tenant-engaged production arrangements.
   
   
2. Definition of a fishing business: This rule defines a fishing business as including activities where harvested fish enter commerce, vessels engaged in catching fish, the attempted catching of marine animals that are not marine mammals, and work performed on a scientific research vessel or during a scientific research activity.
   
   
3. Requirements for Elected Farm Income: This rule explains that elected farm income includes the following amounts, such as gains, losses, or other dispositions involving assets used in the farming business or fishing business, and may include income passed through an S corporation or partnership.

Step-by-Step (High Level)

Several key steps guide taxpayers in completing Schedule J, Form 1040, for income averaging.

1. Gather prior tax returns: This step involves locating the tax returns for the three previous years to determine each base year’s actual taxable income, capital loss carryover amounts, and any items affecting those earlier years.
   
   
2. Calculate farming or fishing income for the election year: This step involves adding all farm income, fishing income, other disposition gains, and any net capital gain attributable to your farming or fishing business to ensure the correct income amount is recorded.
   
   
3. Determine your elected farm income: This step requires selecting the portion of elected farm income that you want to average and verifying that the amount does not exceed your taxable income for the election year.
   
   
4. Apply the one-third allocation calculation: This step requires dividing the elected income by one-third and allocating that amount to each of the three base years before recalculating their tax using the tax rates and tax brackets that applied in those years.
   
   
5. Recompute tax for current and prior years: This step involves recalculating the tax liability for the election year and the base years using Schedule J of Form 1040, along with the correct tax rate schedules for each applicable year.
   
   
6. Complete filing and attach the required forms: This step involves preparing Form 1040, attaching Schedule J, and including other forms that support capital gains, capital losses, and adjustments that may impact future years.

Common Mistakes and How to Avoid Them

Several errors can affect the accuracy of income averaging calculations.

1. Including ineligible income: This mistake occurs when taxpayers include sales of land, development rights, or other disposition amounts that do not qualify for inclusion. The solution is to ensure that only property used in a farming business or a fishing business is included. Be sure to address any unfiled federal returns before filing Schedule J to ensure compliance.
   
   
2. Incorrect capital gains classification: This mistake occurs when taxpayers incorrectly classify net capital gains attributable to farming or fishing. The solution is to follow the worksheets that apply to capital gains and related calculations.
   
   
3. Not adjusting for capital loss carryover: This mistake occurs when taxpayers fail to complete the worksheets for capital loss or capital loss carryover in base years. The solution is to use the correct forms so that taxable income is adjusted correctly.
   
   
4. Misreporting tenant production arrangements: This mistake occurs when individuals report income from reselling plants or from a tenant engaged in production that does not qualify as such. The solution is to verify that all income arises from a qualifying farming business relationship.
   
   
5. Failing to amend returns when necessary: This mistake occurs when substantial errors are found, but the taxpayer does not submit an amended return. The solution is to follow the Internal Revenue Service's rules for correcting returns that affect income averaging.

If you incur penalties due to calculation mistakes or late filings, you may qualify for penalty abatement.

What Happens After You File

After filing IRS Form 1040 Schedule J (2013), the Internal Revenue Service will process the return and apply your revised income tax calculation based on the averaging method. Your tax liability may decrease if the averaging produces a lower tax than the regular calculation. Any refund will be processed according to standard timelines. Any remaining balance must be paid promptly to avoid penalties. The election does not affect how income tax applies to a minor child, nor does it alter obligations for a joint return. 

If a tax balance remains after income averaging, an Offer in Compromise could help you settle your IRS debt for less.

FAQs

Can I use income averaging if my farming or fishing income fluctuates significantly from year to year?

Yes, you can use income averaging when your farm income or fishing income rises sharply compared to prior years because Schedule J allows the allocation of one-third of elected income across base years.

Does Schedule J apply to both a farming business and a fishing business?

Yes, IRS Form 1040 Schedule J (2013) applies to individuals engaged in a farming business or a fishing business, including activities involving agricultural or horticultural commodities and fish harvested for commercial purposes.

Does income averaging reduce my Alternative Minimum Tax?

No, income averaging does not alter how the alternative minimum tax is calculated; you must still complete AMT forms if required.

Can I file an amended return if I made an error in my first Schedule J filing?

Yes, you may file an amended return when corrections are needed, and the Internal Revenue Service will process the revised Schedule J based on your updated information.