2011 Instructions for Schedule J | Income Averaging
for Farmers and Fishermen Checklist
Schedule J allows farmers and fishermen to average farm or fishing net income over three years to reduce tax liability attributable to unusually high current-year income. This 2011 form applies to individuals claiming farm or fishing income, while corporate entities, trusts, and estates remain ineligible to use this averaging method.
Eligibility Requirements for Farm Income Averaging
If you have taxable income from farming or fishing activities that you wish to average over the previous three base years, you may utilize Schedule J. The Internal Revenue Service does not require that more than half of your gross income come from farming or fishing.
You do not need to have been involved in the farming or fishing industry during any of the base
years (2008, 2009, or 2010). Nonresident aliens with U.S. farming or fishing income may use
Schedule J by attaching it to Form 1040NR, though corporate entities, trusts, and estates cannot use this form.
What Qualifies as Elected Farm Income
Elected farm income includes the amount of your taxable income from farming or fishing that you elect to include on line 2a of Schedule J. This encompasses income, gains, losses, and deductions attributable to your farming operation or fishing activities.
Your elected farm income may include net capital gains from the sale or disposition of property regularly used in your farming or fishing business for a substantial period of time. Capital gains from a qualifying farm or fishing property are includable in your elected farm income calculation.
Lines 2b and 2c on Schedule J specifically accommodate these capital gain amounts. Line 2b captures the excess of net long-term capital gain over net short-term capital loss attributable to the farming business or fishing business, while line 2c captures unrecaptured section 1250 gain attributable to your farming or fishing activities.
Elected farm income does not include income, gain, or loss from the sale or other disposition of land. Income from the sale of development rights, grazing rights, and other similar rights also remains excluded, regardless of how long you held the property or rights in your farming operation.
Required Documentation for Three Base Years
Gather the following documents before you begin
- You should gather your Schedule F (farm income) or Schedule C (self-employment
fishing income) for tax years 2011, 2010, and 2009 to document income eligible for averaging.
- Collect all supporting Schedule K-1 forms, Forms 1099, and complete farm business
records for each of the three base years to substantiate your reported income and deductions.
- Obtain copies of your original or amended income tax returns for each base year so you
can accurately figure your tax on Schedule J.
Keep a copy of your 2011 income tax return to use for income averaging in 2012, 2013, or 2014.
You may request copies of prior tax returns if needed to complete the base year calculations accurately.
How to Complete Schedule J for Income Averaging (2011
Step-by-Step Instructions)
Step 1: Enter Current-Year Taxable Income
Complete Schedule J, line 1, by entering your 2011 taxable income from Form 1040, line 43, or from Form 1040NR, line 41. This represents your baseline taxable income before the Schedule
J averaging adjustment is applied, ensuring that all other deductions, credits, and income items remain intact in this baseline calculation.
Step 2: Calculate Elected Farm Income
Enter the amount of your 2011 taxable income from farming or fishing that you elect to include on line 2a. This is your elected farm income from Schedule F (line 36), Schedule C (line 31), or other applicable schedules such as Schedule E, Schedule D, or Form 4797.
Complete lines 2b and 2c if your elected farm income includes net capital gain from the sale or disposition of property regularly used in your farming business. Subtract line 2a from line 1 to arrive at your taxable income excluding the elected farm income amount on line 3.
Step 3: Calculate Tax on Non-Farm Income
Calculate the tax on the amount on line 3 using the 2011 tax rates, tax brackets, or tax forms specified in the instructions. Enter this tax amount on line 4 to establish the tax liability on your non-farming or non-fishing income.
Step 4: Enter Base Year Taxable Income
Enter taxable income for 2008, 2009, and 2010 on lines 5, 9, and 13 using the appropriate lines from your prior-year tax returns. If you amended prior-year returns using Form 1040-X, use the amended figures rather than the original amounts.
Follow the specific instructions for entering the correct base-year amounts if you used this schedule in any prior year to avoid double-counting income. This ensures accurate allocation of your elected farm income across the three base years.
Step 5: Allocate Elected Farm Income Across Base Years
Divide the amount on line 2a by 3.0 and enter the result on lines 6, 10, and 14. This allocates one-third of your elected farm income to each of the three base years for averaging purposes.
Combine each base year’s taxable income with one-third of your elected farm income. Calculate the tax for each year using the applicable prior-year tax rates from the 2008, 2009, and 2010 tax rate schedules. Enter these calculated tax amounts on lines 8, 12, and 16 to reflect what your tax liability would have been if you had earned the income in those years.
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Step 6: Calculate Total Tax and Compare Results
Add the taxes calculated on lines 4, 8, 12, and 16 on line 17 to arrive at your total tax using income averaging. On lines 19, 20, and 21, enter the actual federal income tax you paid or reported for 2008, 2009, and 2010 from your original tax returns or as previously adjusted. Add these base-year taxes on line 22, then subtract line 22 from line 18 to arrive at your Schedule J tax on line 23.
Filing Schedule J with Your Income Tax Return
Compare the line 23 amount to your tax liability calculated without averaging on your Form
1040. If Schedule J provides a lower tax burden, attach Schedule J directly behind page 2 of
Form 1040 or Form 1040NR.
Place it after Schedule 8812 if present, as specified in the 2011 Form 1040 assembly instructions. This election does not apply when figuring your alternative minimum tax on Form
6251.
You do not have to recompute the tax liability of any minor child who was required to use your tax rates in the prior years because of this election. Sign, date, and verify that all required schedules are present before filing your income tax return by tax day or your extended deadline.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
