IRS Form 1040 Schedule J (2015): Farmers and Fishermen

What IRS Form 1040 Schedule J (2015) Is For

IRS Form 1040 Schedule J (2015) provides a way for farmers and fishermen to use income averaging when reporting taxable income that fluctuates from year to year. The form allows eligible individuals to spread specific farm income or fishing income over the three previous tax years to prevent a sudden increase in tax liability caused by entering a higher tax bracket. This option is particularly useful for individuals in farming or fishing businesses that experience irregular production cycles or unpredictable income levels.

For more details about Schedule J and other tax topics for farmers and fishermen, visit the IRS Form Help Center.

When You’d Use IRS Form 1040 Schedule J (2015)

This form applies in several situations involving changes in income within a farming or fishing business.

1. Large fluctuations in farm or fishing income: This applies when your farming or fishing business experiences income changes that push you into a higher tax bracket, making income averaging helpful.
   
   
2. Filing an amended return: This applies when you discover that using income averaging would reduce your income tax liability for the affected tax year.
   
   
3. Correcting taxable income reported in prior tax years: This applies when adjustments or corrections to previous years require updating the calculation of the averaged income.
   
   
4. Using income averaging for new farming or fishing operations: This applies even when you did not operate a farming business or fishing business in the previous years used for averaging.

Key Rules or Details for Tax Year 2015

Several rules govern the income averaging process when filing IRS Form 1040, Schedule J (2015).

1. Definition of elected farm income: This includes income, gains, and deductions from a farming business or fishing business that involve agricultural or horticultural commodities or marine animal harvesting activities.
   
   
2. Exclusions from elected farm income: This includes gains from selling land, grazing rights, or similar interests that cannot be used for calculating income averaging.
   
   
3. Treatment of net capital gain attributable to farming or fishing: This requires special calculations that evaluate how the total net capital gain affects the average income portion for each year.
   
   
4. Rules for lease arrangements or written lease terms: This applies when a tenant engaged in cultivating land or producing horticultural commodities grown under a written lease reports income that qualifies as farm income.
   
   
5. Limits related to actual taxable income: This requires ensuring that the elected farm income does not exceed the taxable income reported for the year.
   
   
6. Interaction with the Alternative Minimum Tax: This involves calculating the Alternative Minimum Tax without applying income averaging from Schedule J to determine if additional tax is due.

Step-by-Step (High Level)

Filing IRS Form 1040 Schedule J (2015) requires completing several structured steps that apply the income averaging rules across multiple tax years.

1. Determine the taxable income for the 2015 tax year: This requires identifying the amount of income that will be included as elected farm income before beginning any income averaging calculation. It’s important to resolve any unfiled federal returns before attempting income averaging.
   
   
2. Remove the elected farm income from your 2015 taxable income: This provides the baseline tax amount that reflects what your income tax liability would be without the averaging election.
   
   
3. Divide the elected farm income into equal portions for the base years: This divides the averaged income across previous years to apply each year’s tax rates and determine how the income average affects overall tax liability.
   
   
4. Recalculate tax returns for the three previous years using adjusted income: This requires recalculating taxes for those years with the adjusted taxable income amounts based on the averaged income.
   
   
5. Apply special rules for capital gain or capital loss carryover: This ensures that any net capital gain or capital loss attributable to the farming or fishing business is applied correctly to the averaged income amount.
   
   
6. Compare the calculated income tax liability to the regular 2015 tax amount: This determines whether filing Schedule J results in a lower tax amount than calculating taxes without income averaging.

Common Mistakes and How to Avoid Them

Several common issues can occur when filing IRS Form 1040 Schedule J (2015).

1. Including land sales as elected farm income: This should be avoided by excluding gains from selling farmland, permanent rights, or any other disposition that does not qualify as elected farm income.
   
   
2. Skipping required worksheets for years with zero or negative taxable income: This should be avoided by completing the IRS worksheets that adjust for net operating losses, capital loss carryover, and other necessary calculations.
   
   
3. Averaging all farm income without comparing different amounts: This should be avoided by testing multiple elected farm income options to determine which amount produces the lowest income tax liability.
   
   
4. Forgetting to include qualifying income from an S corporation farming business: This should be avoided by ensuring that all income from an S corporation related to the farming business or fishing business is correctly reported.
   
   
5. Failing to maintain tax returns from previous years: This should be avoided by keeping proper documentation, as income averaging requires accurate information from the three prior tax years.

If errors or late filings result in IRS penalties, you may be eligible for penalty abatement.

What Happens After You File

Once you file IRS Form 1040 Schedule J (2015) with your Form 1040, the Internal Revenue Service processes the tax return using the averaged income amounts. The IRS may review the figures to confirm that the elected farm income, taxable income, and calculations for previous years were completed correctly. You should keep copies of all tax returns because income averaging may affect future years if you choose to file Schedule J again. Suppose an adjustment is made to prior-year tax returns. In that case, you may need to update the averaged income and file an amended return to ensure that the income tax liability is reported accurately.

FAQs 

Can new farmers use income averaging on IRS Form 1040 Schedule J (2015)?

Yes, new farmers may use income averaging even if they did not operate a farming business in previous years. The rules allow the election as long as the individual has a qualifying elected farm income during the 2015 tax year.

Does a change in filing status affect eligibility for income averaging?

A change in filing status does not prevent the use of Schedule J. The calculations apply the correct tax rates for each tax year, ensuring the averaging process remains accurate.

Can gains from selling farmland be considered as elected farm income?

Gains from selling farmland or permanent land rights cannot be included as elected farm income. Only income from the farming or fishing business and property used in that business for a substantial period may be included. 

Does farm income averaging affect alternative minimum tax calculations?

Income averaging does not apply when calculating the alternative minimum tax. The AMT is calculated using regular taxable income rather than the average income amount.