Income Averaging for Farmers and Fishermen 2010
Checklist
Schedule J allows eligible farmers and fishermen to average net farm or fishing income over three years, reducing tax liability from volatile annual income. This form applies to individuals with qualifying farm or fishing business income; corporate farmers are ineligible.
Nonresident aliens who file Form 1040NR and meet other eligibility requirements can use
Schedule J. No year-specific stimulus, ACA, or TCJA provisions apply to this 2010 form.
No special federal tax programs or relief provisions modified the income-averaging rules for
Schedule J in 2010. The form functions under permanent income-averaging rules for qualified farmers and fishermen only.
Ten-Step Checklist
Step 1: Verify Eligibility
Confirm you are an individual farmer or fisherman engaged in a farming or fishing business.
Corporations, partnerships, estates, and trusts cannot use Schedule J for income averaging.
Partners in partnerships and shareholders in S corporations can elect income averaging on their personal returns. You do not need to have been engaged in farming or fishing during any of the three base years to qualify.
Your filing status does not need to match your filing status in the base years. Nonresident aliens filing Form 1040NR can use Schedule J if they meet other eligibility requirements.
Step 2: Gather Current-Year Farm or Fishing Income Documentation
Collect Schedule F (Form 1040), Schedule C (Form 1040), or applicable K-1 statements
showing net farm or fishing income for the current tax year. Partners in farming partnerships receive their farm income information on Schedule K-1 and report it on their individual returns.
S corporation shareholders may treat compensation from the corporation attributable to the farming business as farm income for income averaging purposes. Services performed as an employee are generally disregarded in determining whether an individual is engaged in a farming business.
Step 3: Gather Three-Year Prior Income Documentation
Obtain Schedule F, Schedule C, or K-1 forms for the three preceding tax years to calculate the three-year average base income required on Schedule J, Line 1. Keep complete records from prior years, including any previously filed Schedule J forms if you used income averaging in those years.
The base years are the three tax years immediately preceding the current year for which you are filing. You may need copies of your original or amended income tax returns for 2007, 2008, and 2009 to figure your tax on Schedule J.
Step 4: Calculate Elected Farm Income
Determine the amount of farm or fishing income to be averaged (the “elected farm income”).
This amount must not exceed your net farm or fishing income for the current year and cannot exceed your total taxable income.
Elected farm income includes all income, gains, losses, and deductions attributable to your farming or fishing business, including gains or losses from the sale or disposition of property regularly used in your farming or fishing business. You can elect any amount up to your total qualifying income; you are not required to include all of your farm or fishing income in the election.
Step 5: Complete Schedule J Part I
Enter the elected farm income on Line 1 of Schedule J. Copy the three prior years’ net farm or fishing income onto Lines 2, 3, and 4 as required by the form instructions.
If you used Schedule J in a prior year, you must enter specific line amounts from those prior
Schedule J forms rather than your actual taxable income for those years. Make adjustments following the instructions for each line based on whether you filed Schedule J in any base year.
Step 6: Calculate and Report Averaged Income
On Lines 5 and 6, compute the average of the three prior years’ income and the income base used for tax calculations as directed in Schedule J Part I instructions. Divide your elected farm income by three, and add one-third of that amount to each of your three base year income amounts.
This process allocates your current year’s elected farm income equally across the three prior years for tax calculation purposes. The allocation allows you to take advantage of lower tax brackets that may have been available in prior years.
Step 7: Compute Tax Using Averaged Income
Complete Schedule J Part II using the tax computation tables or worksheet referenced in the
2010 Schedule J instructions to calculate the tax liability on averaged income. You must figure the tax separately for each base year using the tax rates that were in effect for that year.
The form includes specific worksheets and rate schedules for 2007, 2008, and 2009 to ensure accurate calculations. Use the appropriate tax rate schedule based on your filing status for each year.
Step 8: Determine Tax Benefit
Calculate the difference between the tax on average income (Part II) and the tax on actual current-year income to verify whether income averaging reduces your total federal tax.
Complete your regular Form 1040 tax calculation first to compare the results.
Attach Schedule J only if using it actually reduces your tax; the form instructions caution that your tax may be less if you figure it using the standard tax tables or worksheets instead. Income averaging does not apply when figuring your alternative minimum tax on Form 6251.
Step 9: Attach Schedule J to Form 1040
Staple the completed Schedule J behind Form 1040 or Form 1040NR with the signed tax return.
Ensure all entries on Schedule J Lines are consistent with corresponding entries on your Form
1040 or Form 1040NR and Schedule F or Schedule C.
The form attaches in the designated sequence with other schedules and supporting documentation. Include Schedule J with your timely filed return, including extensions, for the year.
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Step 10: Sign, Date, and File
Sign and date Form 1040 or Form 1040NR and any required attachments. File the complete return, including Schedule J, according to the filing instructions on the IRS Where to File page for Form 1040 and Schedule J 2010.
Keep copies of your filed returns and all supporting documentation for at least three years after the filing deadline or the date you filed, whichever is later. Maintain copies of your 2010 income tax return to use for income averaging in 2011, 2012, or 2013.
Form-Specific Limitations
Corporations, partnerships, estates, and trusts cannot use Schedule J for income averaging.
The election must be made by individuals, including partners in partnerships and shareholders in S corporations, on their personal income tax returns.
Partners in farming partnerships obtain income data from K-1 statements and report farm income on their individual returns; the partnership itself does not make the income averaging election. S corporation shareholders engaged in farming businesses may treat wages and compensation from the corporation attributable to the farming business as farm income eligible for averaging.
2010 Schedule J Changes from Prior Guidance
No substantial line redesigns, section additions, or removals occurred in the 2010 Schedule J instructions relative to the permanent income-averaging structure. The form retained its two-part structure (Part I: income calculation; Part II: tax computation) and line-item layout from prior guidance, with only routine annual updates to worksheet references and tax table citations.
The 2010 version continues to reference the three immediately preceding tax years (2007,
2008, and 2009) as base years for averaging calculations. All tax rate schedules and worksheets reflect the applicable tax law in effect for each respective base year.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
