IRS Form 1040 Schedule J (2017): Farmers and Fishermen

What IRS Form 1040 Schedule J (2017) Is For

IRS Form 1040 Schedule J (2017) is used by farmers and fishermen who wish to apply income averaging to their taxable income, thereby reducing their income tax liability during fluctuating tax years. Income averaging allows farming or fishing business income to be distributed across earlier tax years so the taxpayer does not move into a higher tax bracket unnecessarily. This approach helps minimize overall tax liability when farm income or fishing income increases sharply in the current tax year, according to Internal Revenue Service rules.

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When You’d Use IRS Form 1040 Schedule J (2017)

Taxpayers typically use this form to reduce their income tax by applying income averaging during years with significant income fluctuations.

• High fluctuation in farm income or fishing income: This applies when a taxpayer experiences an unusually profitable year from cultivating land, harvesting agricultural or horticultural commodities, or engaging in a fishing business that may push them into a higher tax bracket.
  
  
• Filing an Amended Return: This applies when a taxpayer later decides that income averaging for farmers or fishermen will reduce their taxes owed and submits an amended return to claim the benefit.
  
  
• Late filing situations: This applies when a taxpayer did not initially elect income averaging but still qualifies to file Schedule J Form 1040 as long as farming or fishing income is documented.
  
  
• Switching filing status: This applies when a taxpayer’s filing status differs across tax years, but they still want to elect income averaging for the current tax return.
  
  
• New participants in farming or fishing: This applies to taxpayers who have recently entered a farming business or fishing business and wish to use the average income rules, even if they have no prior years of farm income or fishing income.

Key Rules or Details for IRS Form 1040 Schedule J (2017)

Before deciding to file Schedule J, taxpayers must understand several rules that affect eligibility, calculations, and tax outcomes.

• Qualifying activities: This applies when income comes from cultivating land, raising plant life, harvesting agricultural or horticultural commodities, reselling plants, or operating a fishing activity that includes fish harvested or marine mammals taken for tax purposes under Internal Revenue Service guidelines.
  
  
• Only individuals may file: This applies when only individual taxpayers filing Form 1040 can elect income averaging; entities, such as partnerships, S corporations, or estates, cannot file Schedule J.
  
  
• Elected farm income limitations: This applies when elected farm income cannot exceed taxable income reported for the current tax year and must exclude income from leasing land, selling land rights, or similar non-operational transactions.
  
  
• Capital gain reporting: This applies when taxpayers must identify total net capital gain or net capital gain attributable to farming or fishing activities and allocate one-third of that amount to each of the three previous tax years.
  
  
• Alternative Minimum Tax Consideration: This applies when taxpayers must calculate the Alternative Minimum Tax separately because income averaging does not affect AMT calculations.

Step-by-Step (High Level)

IRS Form 1040 Schedule J (2017) involves several structured steps that help determine whether income averaging provides a lower income tax liability.

• Determine elected farm income: This applies when the taxpayer identifies all farming or fishing income from sources such as Schedule F, Form 4797, Schedule D, or income reported from a scientific research vessel or tenant's production under a written lease entered into for a substantial period.
  
  
• Calculate the base tax: This applies when the taxpayer subtracts elected farm income from current taxable income and calculates the resulting tax using the appropriate tax rates.
  
  
• Apply the averaged income to the base years: This applies when one-third of the average income is assigned to each of the previous three tax years, allowing the tax brackets for those years to be recalculated.
  
  
• Adjust for capital gain or lease arrangements: This applies when any capital gain or lease payments connected to agricultural or horticultural commodities or fishing activities must be allocated across all base years for tax purposes.
  
  
• Determine final tax liability: This applies when the taxpayer compares the recalculated taxes owed across all years with standard tax computations to confirm that income averaging works to provide a lower tax result before electronically filing the return.

Common Mistakes and How to Avoid Them

Many errors occur when taxpayers prepare Schedule J, and understanding these issues helps prevent inaccurate tax filings.

• Including ineligible income: Taxpayers avoid this by ensuring they exclude proceeds from leasing land, selling land rights, or other transactions unrelated to operating a farming or fishing business when calculating elected farm income.
  
  
• Incorrect capital gain allocation: Taxpayers avoid this by confirming that all capital gain amounts are divided evenly across all three tax years and are not reduced by any capital loss carryover that existed in a base year.
  
  
• Using incorrect taxable income from previous years: Taxpayers avoid this by reviewing all past tax returns to ensure figures reflect amended returns, itemized deductions, and any adjustments made by the Internal Revenue Service.
  
  
• Ignoring AMT limitations: Taxpayers avoid this by calculating the alternative minimum tax separately, allowing them to confirm whether income averaging still lowers their tax burden for the current tax year.
  
  
• Failing to compare outcomes: Taxpayers avoid this by comparing the averaged income tax results with standard tax calculations to verify that the income averaging benefit actually reduces overall tax liability.

Use an IRS account transcript to confirm taxable income and capital gains from prior years when preparing your return.

What Happens After You File

After filing IRS Form 1040 Schedule J (2017), the Internal Revenue Service processes the tax return using the averaged income calculations provided. The election becomes part of the permanent tax record for that tax year, and taxpayers may need the exact figures in later years if they apply income averaging again. If you’re facing penalties for late filings or amendments, learn if you qualify for IRS penalty abatement.

FAQs

What income qualifies as farm income under IRS Form 1040 Schedule J (2017)?

Farm income includes income from cultivating land, raising plant life, harvesting agricultural or horticultural commodities, or operating a farming business that produces goods entering commerce. It also generates revenue from tenant production when a written lease is in place for a substantial period of time.

Can fishing businesses use income averaging even with low previous years of fishing income?

Yes, fishing businesses may use income averaging even if previous years had low or no fishing income, as long as the current tax year includes qualifying fishing income. The Internal Revenue Service only requires that fishing income be earned in the year the election is made, not in the year the income is reported.

Does income averaging affect self-employment tax for farmers and fishermen?

Income averaging does not change how self-employment tax or self-employment taxes are calculated, as it only affects income tax liability. Taxpayers must calculate self-employment tax separately on their tax return.

Can I use IRS Form 1040 Schedule J after I have electronically filed my return?

A taxpayer cannot add Schedule J after electronically filing unless they submit an amended return. An amended return allows them to elect income averaging if it results in a lower overall tax liability.