2021 Instructions for Schedule J | Income Average for
Farmers and Fishermen Checklist
Schedule J allows eligible farmers and fishermen to elect income averaging by distributing current-year farm or fishing income over the prior three years for tax calculation purposes. This election can reduce your income tax liability when your current-year income is high and your taxable income for one or more of the three prior years was low.
The 2021 form operates under the Tax Cuts and Jobs Act framework and does not accommodate year-specific stimulus programs, advance premium tax credit reconciliation, or pandemic-related unemployment exclusions. No year-specific credit expansions apply directly to
Schedule J for the 2021 income tax year.
Eligibility Requirements for Schedule J
You must be engaged in a farming business or fishing business during the election year to use
Schedule J. A farming business includes cultivating land, raising or harvesting agricultural or horticultural commodities, operating a nursery or sod farm, and raising animals for profit.
Lease arrangements qualify only if payments are based on a share of production under a written agreement entered into before the tenant begins significant activities. Fishing businesses involve the capture, harvesting, or sale of fish for commercial purposes, such as trade, barter, or sale.
Individuals filing Form 1040, Form 1040-SR, or Form 1040-NR can attach Schedule J to elect income averaging. Nonresident aliens filing Form 1040-NR can use Schedule J if they have taxable income from a U.S. farming or fishing business.
You do not need to have been engaged in a farming business or fishing business during any of the three base years to make the election. Sole proprietors, partners in partnerships engaged in farming or fishing, and shareholders of S corporations engaged in these businesses qualify to make the election under the Internal Revenue Code.
Preparing Documentation and Calculating Elected Farm
Income
Step 1: Gather Prior-Year Tax Returns
Collect your federal income tax returns for the three prior tax years immediately preceding the current year. You will need these income tax return documents to complete the base year calculations required on Schedule J.
Step 2: Collect Current-Year Farm Income Documentation
Gather Schedule F (Form 1040), Profit or Loss From Farming, along with all supporting
documentation. Required records include K-1 forms from partnerships or S corporations, Form
1099-NEC, Form 1099-MISC, and complete records of farm receipts and expenses.
- If you used Schedule J to figure your income tax for 2020, enter the amount from your
- If you used Schedule J for 2019 but not 2020, enter the amount from your 2019
- If you used Schedule J for 2018 but not 2019 or 2020, enter the amount from your 2018
- If you did not use Schedule J for any of those years, enter the taxable income from your
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Step 3: Calculate Your Elected Farm Income
Determine your net farm profit or loss using Schedule F or equivalent business return documentation. Your elected farm income is the amount of your taxable income from farming or fishing that you elect to include on Schedule J.
Elected farm income can include income, gains, losses, and deductions attributable to your trade or business of farming or fishing. You do not have to include all of your farm or fishing income; it may benefit you to include less than the entire amount, depending on how the election affects your income tax bracket.
Your elected farm income cannot exceed your taxable income for the current year. Only net farm or fishing income appearing on Schedule F or equivalent farming partnership or S corporation
K-1 qualifies for income averaging under Internal Revenue Service rules.
Completing Schedule J Lines 1 Through 4
Enter the taxable income from your 2021 Form 1040, Form 1040-SR, or Form 1040-NR on line
1 of Schedule J. Enter your elected farm income on line 2a without exceeding the amount shown on line 1.
Complete lines 2b and 2c if your elected farm income includes net capital gain. Line 2b requires the portion treated as net capital gain, while line 2c requires any unrecaptured section 1250 gain attributable to your farming or fishing business.
Subtract line 2a from line 1 and enter the result on line 3. Calculate the income tax on the amount shown on line 3 using the 2021 tax tables or worksheets and enter that amount on line
4.
Completing Base Year Calculations
Complete lines 5 through 8 for the first base year (2018) using the following guidelines:
2020 Schedule J, line 11, on line 5.
Schedule J, line 15, on line 5.
Schedule J, line 3, on line 5.
2018 tax return on line 5.
Divide the amount on line 2a by 3.0 and enter the result on line 6. Add lines 5 and 6 and enter the total on line 7.
Calculate the income tax on the amount shown on line 7 using the 2018 tax rates and enter that amount on line 8. Follow similar procedures to complete lines 9 through 12 for the second base year (2019) and lines 13 through 16 for the third base year (2020).
Each base year calculation adds one-third of your elected farm income to that year’s taxable income and recalculates the income tax using that year’s applicable tax rates. Add the tax amounts from lines 4, 8, 12, and 16 and enter the total on line 17.
Finalizing Your Tax Calculation
Complete lines 18 through 22 by entering the tax amounts from your prior-year returns or prior-year Schedule J forms as directed in the instructions. Only include tax imposed by section
1 of the Internal Revenue Code on these lines.
Add lines 19 through 21 and enter the total on line 22. Subtract line 22 from line 18 and enter the result on line 23.
This amount represents your tax calculated using income averaging. Compare the tax amount on Schedule J, line 23, to your tax calculated using the regular 2021 tax tables or worksheets.
Attaching Schedule J to Your Tax Return
Attach Schedule J to your Form 1040 only if you are using it to calculate your tax, and it results in a lower tax liability. Enter the tax amount from Schedule J, line 23, on Form 1040, line 16, if you elect to use income averaging.
Your farm income amounts on Schedule F and Form 1040 remain unchanged when you use
Schedule J. The election affects only the tax calculation on Form 1040, line 16, not the income reporting on other lines.
Schedule J filers should verify that their Social Security number appears correctly on Form 1040 before submitting their return. Your Social Security number must match Internal Revenue
Service records to avoid processing delays.
Making Changes to Your Election
You may change the amount of elected farm income or revoke a previous election by filing an amended return. Changes or revocations are permitted if the period of limitations for filing a claim for credit or refund has not expired for the election year under Internal Revenue Code provisions.
Understanding Your Total Tax Liability
Your total tax liability includes the tax calculated on Schedule J, line 23, plus any other taxes reported on your Form 1040. Schedule J filers must account for self-employment tax, additional
Medicare tax, and other applicable taxes when determining their complete tax obligation.
Estimated tax payments made throughout the year apply against your total tax liability calculated using Schedule J. Nonrefundable credits, such as the child tax credit and retirement savings contributions credit, reduce your tax liability after the Schedule J calculation is complete.
Compare your total tax liability to the sum of your estimated tax payments and nonrefundable credits to determine whether you owe additional tax or qualify for a refund. Internal Revenue procedures require accurate reporting of all tax payments and credits on your income tax return.
Income Restrictions and Limitations
Wages, rental income based on fixed payments, and portfolio income are ineligible and must not be included in Schedule J calculations under Internal Revenue Code Section 1301. Elected farm income does not include income, gain, or loss from the sale or disposition of land or from the sale of development rights, grazing rights, or similar rights.
Lease arrangements for fishing vessels qualify only if payments are based on a share of the catch under a written lease agreement entered into before the lessee begins significant fishing activities. Fixed lease payments do not qualify for income averaging treatment under Internal
Revenue Code guidelines.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
