Schedule J 2018 Income Averaging Guide for Farmers

continued to be subject to the shared responsibility payment.

Eligibility Requirements for Schedule J Income Averaging

You can use Schedule J if you were engaged in a farming or fishing business during the current tax year as an individual taxpayer, a partner in a partnership, or a shareholder in an S corporation. The IRS does not require you to have been engaged in farming or fishing during any of the three prior base years to qualify for income averaging.

Individual partners and S corporation shareholders may use Schedule J to average their distributive share of farm or fishing income reported on Schedule K-1, though the partnership or

S corporation entities themselves cannot file this form. Sole proprietors operating a trade or business of farming or fishing report their income directly on Schedule F and may use income averaging without restriction.

Corporations, partnerships, S corporations, estates, and trusts cannot use income averaging under any circumstances. Farm income averaging eligibility extends only to individual taxpayers who report qualifying business income on their personal tax return, regardless of their filing status.

If you are a shareholder of an S corporation engaged in a farming business, you may treat compensation received from that corporation as farm income for averaging purposes when the compensation is attributable to the farming business. Partners receiving Schedule K-1 from farming partnerships should review their distributive share amounts carefully to determine which portions qualify as elected farm income.

Required Documentation and Records

Gather Schedule F (Form 1040, Profit or Loss From Farming) or Schedule C (Form 1040, Profit or Loss From Business) documenting current-year farm or fishing income. You need prior year returns for 2015, 2016, and 2017 showing your taxable income for those base years.

Supporting farm and fishing business records include the following items

• Sales documents should clearly show income earned from crops, livestock, or fish during

the tax year.

• Expense receipts must substantiate business costs and deductions claimed for farming

or fishing operations.

• Depreciation worksheets must document assets used in farming or fishing operations

and support depreciation deductions claimed.

• Basis calculations must support the adjusted basis of assets sold during the tax year and

any resulting gain or loss.

The three base years used for 2018 income averaging are 2015, 2016, and 2017. You must have access to your original or amended tax return for these years to complete Schedule J accurately.

Completing Schedule J Form 1040

1. Step 1: Enter Current Year Taxable Income and Elected Farm Income

   Enter your 2018 taxable income from Form 1040, line 10, or Form 1040NR, line 41, on

   Schedule J, line 1. Line 2a requires you to enter your elected farm income, which is the amount of taxable income from farming or fishing that you choose to average.

   You do not have to include all of your farm or fishing income on line 2a. Selecting a lower amount may provide better tax results depending on how the averaging affects your income tax brackets across all four years.

2. Step 2: Complete Capital Gain Information

   Complete lines 2b and 2c if your elected farm income includes net capital gain. Line 2b requires the portion of your elected farm income treated as net capital gain, which cannot exceed the smaller of your total net capital gain or the net capital gain attributable to your farming or fishing business.

   Line 2c requires any unrecaptured section 1250 gain attributable to your farming or fishing business. These amounts affect how taxes are calculated on the average income in each base year.

• Lines 5, 9, and 13 require you to enter your taxable income from base years 2015, 2016,
• If you used Schedule J to figure your 2017 tax, enter the amount from your 2017
• If you did not use Schedule J for 2015, 2016, and 2017, enter the taxable income from
• If any base year taxable income is zero or less, you must complete the special

3. Step 3: Enter Base Year Taxable Income

   and 2017, respectively. Follow specific instructions for each year based on whether you used Schedule J in prior years.

   Schedule J, line 11, on line 5. your tax returns for those years. worksheets provided in the instructions to calculate the correct amount.

4. Step 4: Calculate Three-Year Average

   Calculate the three-year average by dividing your elected farm income by 3.0 on line 6. This one-third amount is then added to each base year’s taxable income to determine the tax liability for each year using the tax rates in effect for that year.

   Combine line 5 and line 6 to get line 7, then figure the tax on line 7 using 2015 tax rates. Repeat this process for 2016 on lines 9 through 12 and for 2017 on lines 13 through 16.

5. Step 5: Calculate Current Year and Total Averaged Tax

   Line 3 requires you to subtract line 2a from line 1. Line 4 requires you to calculate the tax on line

   3 using the current-year 2018 tax rates.

   You must use the appropriate 2018 Tax Table, Tax Computation Worksheet, Qualified Dividends and Capital Gain Tax Worksheet, or Schedule D Tax Worksheet, depending on your income composition. Add the taxes from lines 4, 8, 12, and 16 to determine your total tax under the income averaging method on line 17.

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6. Step 6: Complete Final Tax Calculation

   Lines 19, 20, and 21 require you to enter the actual tax you paid for base years 2015, 2016, and

   2017. Add lines 19 through 21 and enter the total on line 22.

   The final tax calculation on line 23 subtracts line 22 from line 18, resulting in your Schedule J averaged tax. Compare this result to the tax calculated using the standard method without averaging and claim only the lower liability.

   Self-Employment Tax and Other Limitations

   Self-employment tax obligations are not reduced by Schedule J income averaging, as the election only affects income tax liability under Section 1 of the Internal Revenue Code. Sole proprietors must calculate self-employment tax on their net self-employment earnings from their trade or business, regardless of whether they elect income averaging.

   The self-employment tax calculation remains separate from the income averaging election and applies to Schedule F or Schedule C business income at the full statutory rate. Estimated tax payment obligations are also not directly reduced by Schedule J, though the income tax savings achieved may affect future quarterly payment requirements.

   Lower total income tax affects quarterly payment calculations, so you should recalculate estimated payments after determining your Schedule J tax benefit. Self-employment tax owed must still be calculated and paid according to Internal Revenue Service requirements for all qualifying self-employment income.

   Filing Requirements and Form Assembly

   Schedule J does not apply when calculating alternative minimum tax on Form 6251. You must attach Schedule J to your Form 1040 or Form 1040NR when filing your 2018 tax return.

   When assembling your paper tax return, the form should be arranged in sequence order with the other schedules, identified as Attachment Sequence No. 20. The Internal Revenue Service

   instructions state to attach Schedule J to Form 1040 or Form 1040NR without specific requirements to staple forms together.

   Your filing status must remain consistent throughout Schedule J calculations, though you may elect income averaging even if your filing status was not the same in the election year and the base years. You must sign and date your 2018 Form 1040 (pages 1 and 2), and both spouses must sign if filing jointly.

   Schedule J requires no separate signature line. File your completed return according to the IRS

   Where to File instructions for 2018 Form 1040, based on your state of residence and whether you are enclosing a payment. Keep copies of your filed returns and all supporting documentation for at least three years from the filing date.

   If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.