Income Averaging for Farmers and Fishermen 2021
Checklist
Understanding Schedule J and Income Averaging
Schedule J allows farmers and fishermen to reduce their tax liability by averaging current-year farm or fishing income over the three prior base years. This form attaches to Form 1040 and applies income from 2021 backward to 2018, 2019, and 2020, recalculating tax at the lower rates from those earlier years.
The 2021 version uses TCJA-era tax brackets and standard deductions, and the averaging election can produce significant tax savings when income spikes above prior-year levels. Only individuals engaged in a farming or fishing trade or business during the tax year may file
Schedule J.
C corporations, estates, and trusts cannot use this income averaging provision under Internal
Revenue Code Section 1301(b)(2). When calculating alternative minimum tax on Form 6251,
the election is not applicable.
Eligibility Requirements
You must be engaged in a farming or fishing trade or business in 2021 to elect income averaging. Eligibility is based on conducting a farming business as defined in Internal Revenue
Code Section 263A(e)(4) or a fishing business as defined in the Magnuson-Stevens Fishery
Conservation and Management Act.
The Internal Revenue Service does not require specific business activity codes for Schedule J eligibility. Individuals operating as sole proprietors qualify, as do partners in partnerships and shareholders in an S corporation engaged in farming or fishing.
You are not required to have been in the farming or fishing business during the three base years of 2018, 2019, and 2020. Engagement in such business during 2021, the election year, is mandatory for all taxpayers who wish to use income averaging.
Gathering Required Documentation
Collect the following forms and schedules before beginning your Schedule J calculations
- You should gather your Schedule F (Profit or Loss from Farming) or Schedule C (Profit
or Loss from Business) for tax year 2021, as well as for each of the three immediately preceding tax years.
- Be sure to include your completed Form 1040 for 2021 along with Schedule 1 (Additional
Income and Adjustments to Income), as these forms provide essential income and adjustment details used in the averaging calculation.
- Collect any Schedule K-1 forms or other business entity statements that report farming
or fishing income from partnerships, S corporations, or other pass-through entities.
- If you filed Schedule J in any of the 2018, 2019, or 2020 tax years, you should also
obtain copies of those prior-year Schedule J forms for reference and carryforward purposes.
These schedules supply the income figures required for averaging calculations throughout
Schedule J, including current-year elected farm income and base-year taxable income entries.
Schedule J integrates with Schedule 1 to report the final result of the averaging calculation.
How to Complete Schedule J for Income Averaging
(Step-by-Step Guide)
Step 1: Enter Current Year Information on Lines 1 Through 3
Lines 1 through 3 on Schedule J capture current-year information for 2021. Line 1 requires your
2021 taxable income from Form 1040, while Line 2a requires your elected farm income for
2021.
You do not have to include all of your taxable income from farming or fishing on Line 2a; you may include less than the entire amount if doing so produces a better tax result. Lines 2b and 2c capture capital gain components of your elected farm income if applicable.
Step 2: Enter Base Year Taxable Income on Lines 5, 9, and 13
Enter base-year taxable income amounts on Schedule J Lines 5, 9, and 13 for 2018, 2019, and
2020, respectively. These figures from the three prior tax years form the baseline for the averaging calculation.
If any base year had zero or negative taxable income, you must complete the applicable taxable income worksheet included in the Schedule J instructions. If you used Schedule J to figure your tax in any prior year, you must enter the carryforward amount from that prior-year Schedule J rather than simply using the taxable income from your Form 1040.
Step 3: Calculate Tax Using the Averaging Method
Schedule J directs you to calculate tax on base-year income amounts with one-third of your elected farm income allocated to each base year. You will recalculate the tax for 2018, 2019, and 2020 as if each year’s taxable income were increased by one-third of your 2021 elected farm income.
Calculate tax on your current-year income separately to determine whether income averaging reduces your tax liability. The instructions include multiple worksheets for calculating tax under different scenarios, including situations involving capital gains, foreign earned income, and qualified dividends.
- You must include Schedule F or Schedule C for tax year 2021, as well as for all three
- Include Schedule 1 (Additional Income and Adjustments to Income), which supports the
- Attach any Schedule K-1 forms or other business entity statements that report farming or
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 4: Transfer Results to Form 1040
Transfer the averaged income amount and corresponding tax calculation to Form 1040 as instructed in the Schedule J line-by-line instructions. The Schedule J output directly affects Form
1040 taxable income and tax liability, so ensure internal cross-references match across all forms.
Filing Your Return with Schedule J
Schedule J may be filed electronically or by paper with your income tax return. Electronic filing is available through Free File Fillable Forms, commercial tax software, or tax professionals, and the Internal Revenue Service recommends this method because it is faster, safer, and more accurate than paper filing.
Attach completed Schedule J to Form 1040 along with the following supporting schedules: base years of 2018, 2019, and 2020, to document your farming or business income. income and adjustment figures reported on Form 1040 and Schedule J. fishing income from partnerships, S corporations, or similar pass-through entities.
Sign and date Form 1040 in the designated spaces; both spouses must sign joint returns. Verify that Schedule J, Form 1040, Schedule 1, and all attachments are included and accurately cross-referenced before submission.
If filing by paper, address and mail the completed return to the filing location specified on the
Internal Revenue Service ‘Where to File’ page for Form 1040. Retain copies of all forms and schedules for your records.
Important Record-Keeping Requirements
Keep copies of your 2021 income tax return and all supporting documentation for at least three years after the filing deadline. You may need these records to complete Schedule J in future tax years if you continue to use income averaging for farm or fishing income.
Schedule J explicitly cross-references current and three prior years of Schedule F or Schedule
C, and you must confirm that income figures match those schedules exactly. Base-year taxable income is entered on Lines 5, 9, and 13, while current-year elected farm income is entered on
Line 2a.
The instructions provide detailed line-by-line guidance for special situations, including zero or negative base-year taxable income and prior-year Schedule J usage. There is no need to recalculate the tax liability of any minor child who was required to use your tax rates in previous years.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
