Schedule J 2019 Income Averaging for Farmers

Income Averaging for Farmers and Fishermen 2019

Checklist

Schedule J allows eligible farmers and fishermen to average their income over three years to reduce tax liability in high-income years. Eligible taxpayers, including U.S. citizens, resident aliens, and certain nonresident aliens who file Form 1040-NR, may use 2019 Schedule J if they have farming or fishing income.

Eligibility Requirements for Schedule J

Your principal business activity must qualify as farming or commercial fishing as defined in IRS instructions. If you meet the IRS eligibility requirements and have taxable income from farming or fishing in 2019, you may use Schedule J.

The Internal Revenue Service does not require you to have been in the farming or fishing business during any of the base years. You may elect to average farming income or fishing income even if your filing status differs between the election year and the base years.

Documentation Requirements for Tax Year 2019

You must complete the appropriate income schedules for your 2019 tax year before beginning

Schedule J calculations. Farmers typically complete Schedule F to report profit or loss from farming operations, while some taxpayers use Schedule C for business income or Schedule E for supplemental income and loss.

Gather all applicable K-1 forms from partnerships or S corporations that report your share of income from farming or commercial fishing. All business income statements, receipts, and expense records must be compiled to support the elected farm income amount you report on

Schedule J.

Base Year Documentation Requirements

Tax returns or reconstructed records for 2018, 2017, and 2016 must show the farming or fishing income you reported for each base year. Copies of Schedule F, Schedule C, or other business schedules for each of the three prior years are required for accurate calculations.

The Internal Revenue Service allows you to request copies of prior-year returns using Form

4506 if you do not have original documents available. Keep a copy of your 2019 income tax return to use for income averaging calculations in 2020, 2021, or 2022.

How to Complete Schedule J for the 2019 Tax Year

1. Step 1: Complete Lines 1 Through 4

   Enter your 2019 taxable income from Form 1040, Form 1040-SR, or Form 1040-NR on Line 1 of

   Schedule J. Line 2a requires your elected farm income, which represents the amount of taxable income from farming or fishing that you choose to average over the three base years.

   If your elected farm income includes net capital gain, complete Lines 2b and 2c to report the excess of net long-term capital gain over net short-term capital loss and any unrecaptured section 1250 gain. Line 3 shows the result of subtracting Line 2a from Line 1, and Line 4 calculates the tax on Line 3 using 2019 tax rates from the tax tables or applicable tax computation worksheets.

2. Step 2: Enter Base Year Income on Lines 5, 9, and 13

   Line 5 requires your 2016 taxable income, which may come from your 2016 Form 1040, Form

   1040-NR, or a prior Schedule J if you used income averaging in a subsequent year. Follow the specific instructions for Line 5 if your 2016 taxable income was zero or less, as a special worksheet helps calculate the correct amount to enter.

   Line 9 requires your 2017 taxable income, and Line 13 requires your 2018 taxable income, with similar provisions for zero or negative amounts. The same income measure must be used consistently across all four years to maintain calculation accuracy.

3. Step 3: Apply the Averaging Calculation

   Line 6 divides your elected farm income by 3.0 to determine the amount allocated to each base year. Add the Line 6 amount to each base year’s taxable income on Lines 7, 11, and 15 to create adjusted income amounts for each prior year.

   Lines 8, 12, and 16 calculate the tax on each adjusted base year amount using 2016 tax rates,

   2017 tax rates, and 2018 tax rates, respectively. Tax calculations may require you to use historical tax tables, Qualified Dividends and Capital Gain Tax Worksheets, or Schedule D Tax

   Worksheets, depending on your income composition.

4. Step 4: Complete Final Tax Calculations

   Line 17 adds the four tax amounts from Lines 4, 8, 12, and 16 to create a preliminary total.

   Lines 18 through 22 require you to enter the actual tax amounts from your 2016, 2017, and

   2018 tax returns or prior Schedule J forms.

   Line 22 totals these historical tax amounts, and Line 23 subtracts Line 22 from Line 18 to produce your Schedule J tax result. This final calculation determines whether income averaging provides a tax benefit for your 2019 tax year.

   Verifying Tax Benefit Before Filing

   Compare your Schedule J tax result from Line 23 with the tax computed using standard 2019 methods. Calculate your tax using the 2019 Tax Table, Tax Computation Worksheet, Qualified

   Dividends and Capital Gain Tax Worksheet, or Schedule D Tax Worksheet as applicable.

   Attach Schedule J to your 2019 Form 1040 only if the averaging method produces a lower tax liability than the regular calculation method. The form includes a caution statement reminding taxpayers to verify that Schedule J provides an actual benefit before including it with their tax return.

   Assembly and Filing Instructions

   Schedule J must be attached in order of Attachment Sequence No. 20, which appears in the upper right corner of the form. Follow the 2019 Form 1040 assembly instructions when organizing schedules and supporting documents for your income tax return.

   Your signature and date must match the Form 1040 signature date, and preparer information must be included if a tax professional prepared your return. Verify that Schedule J pages are included before mailing your return to the correct IRS address based on your state and whether you include a payment.

   Form Limitations and Restrictions

   Schedule J remains restricted to farmers and fishermen exclusively, and no other business types may use this income averaging method regardless of income volatility. Income averaging on Schedule J cannot offset net operating losses from other activities or capital losses beyond the annually allowed limit for your filing status.

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