Income Averaging for Farmers and Fishermen 2022
Checklist
Schedule J enables taxpayers engaged in farming or fishing businesses to average their 2022 income over the prior three tax years under Internal Revenue Code Section 1301. This election allows you to reduce your tax burden when current-year farm income or fishing income fluctuates significantly above prior-year levels.
Eligibility Requirements for Schedule J
To elect income averaging on Schedule J during 2022, you must be involved in a farming or fishing business. The Internal Revenue Code does not mandate that farming or fishing be your primary income source, and you are not required to have operated a farming or fishing business during any of the three base years.
Eligible taxpayers include sole proprietors, partners in partnerships, and shareholders of S corporation entities that conduct farming or fishing activities. You may make this election regardless of whether your filing status remained consistent across all four tax years.
Qualifying Farming and Fishing Activities
A farming business includes cultivating land, raising or harvesting crops, operating nurseries or sod farms, and managing livestock. Share-rent landlords who lease land under written agreements executed before tenants begin significant farming activities qualify as engaged in farming businesses.
Commercial fishing activities that involve the sale, barter, or trade of marine life are referred to as a fishing business. Vessel lessors qualify when lease arrangements base payments on a share of the catch under written agreements signed before fishing activities begin.
Contract harvesting and mere resale of plants or animals raised by others do not constitute qualifying farming businesses under the Internal Revenue Code. You cannot elect income averaging for income derived from these excluded activities.
Filing Requirements and Documentation
You must attach Schedule J to Form 1040, Form 1040-SR, or Form 1040-NR when electing income averaging for 2022. Nonresident aliens engaged in farming or fishing businesses may use Schedule J with Form 1040-NR under the same general eligibility rules.
The election must appear on a timely filed income tax return, including valid extensions granted under Form 4868. You cannot file Schedule J separately from your primary income tax return.
Required Forms and Schedules
Gather these IRS forms and schedules for tax years 2019, 2020, 2021, and 2022 before
completing Schedule J
- Schedule F: This schedule reports the profit or loss from farming activities and
documents income and expenses directly related to operating a farming business.
- Schedule C: This schedule reports business income and expenses from sole
proprietorships, including qualifying farming or fishing activities conducted outside of a formal partnership or corporation.
- Form 4835: This form documents farm rental income and expenses for landowners who
receive rental income based on a share of crop or livestock production rather than cash rent.
- Schedule K-1: These forms report a taxpayer’s share of income, deductions, and
credits from partnerships or S corporations that generate farming income or fishing income.
- Schedule D and Form 8949: These forms are required when elected farm income
includes capital gains, such as gains from the sale of qualifying business or investment assets.
- Form 4797: This form reports gains or losses from the sale, exchange, or involuntary
conversion of business property used in farming or fishing operations.
Request copies of prior-year returns using Form 4506 if you need original or amended income tax return documentation. Maintain complete records for all four years until at least three years after filing your 2022 return.
Ten-Step Process for Completing Schedule J
Step 1: Verify Your Eligibility
Confirm that you are engaged in a farming or fishing business in 2022 and that you have eligible farm or fishing income to average. You are not required to have farming or fishing as your primary source of income, and you are not required to have been engaged in farming or fishing during any of the three base years.
While the election may benefit you if your 2022 farm or fishing income is high and your taxable income for one or more of the three prior years was low, there is no minimum threshold requirement to make the election. Calculate your potential tax savings before proceeding with the full Schedule J preparation.
Step 2: Gather Required Documentation
Collect all Schedule F, Schedule C, Form 4835, and K-1 forms from farm partnerships or S corporations for tax years 2019, 2020, 2021, and 2022. Review each document to ensure accuracy and completeness before beginning your Schedule J calculations.
Step 3: Complete Part I of Schedule J
Reconstruct your taxable income for each of the three prior tax years by entering the amounts required in lines 1 through 3. Use the specific line definitions provided in the 2022 Schedule J instructions for accurate reporting.
If you previously used Schedule J for any base year, enter the applicable line amount from that prior Schedule J rather than the taxable income shown on your original Form 1040. Complete the Taxable Income Worksheet if any base year shows zero or negative taxable income and you did not use Schedule J for subsequent years.
Step 4: Complete Part II of Schedule J
Enter your 2022 taxable income before the income-averaging election on the applicable lines as designated in the 2022 Schedule J form instructions. Calculate your regular tax liability using the tax table, tax computation worksheet, or qualified dividends and capital gain tax worksheet that applies to your filing status.
Step 5: Calculate Averaged Farm or Fishing Income
Follow Part III of Schedule J to compute the average of your farm and fishing income from the three prior years and the current year. Use only the amounts and methodology specified in the
2022 instructions for lines applicable to your income category.
You do not need to include all of your farm income or fishing income on line 2a of Schedule J.
Including less than the entire amount may prove advantageous depending on how the elected amount affects your tax brackets for the current and prior three tax years.
Step 6: Determine the Income-Averaging Adjustment
Follow Part IV of Schedule J 2022 to calculate the difference between your 2022 tax before averaging and your tax computed using the income-averaging method. Ensure all calculations align with the line-by-line guidance in the current-year instructions.
The form requires separate tax calculations for each base year using the tax rates and standard deduction amounts applicable to each respective year in which the income was earned. Your final 2022 tax liability equals your regular tax on income, excluding elected farm income, plus the incremental tax increases from allocating one-third of elected farm income to each base year.
Step 7: Attach Schedule J to Your Form 1040
Schedule J must be attached to your 2022 Form 1040, 1040-SR, or 1040-NR as indicated on the form. Verify that all required entries are complete and that your calculations follow the official instructions.
Step 8: Attach All Supporting Schedules and Forms
File Schedule F, Schedule C, Form 4835, and any required K-1 forms with your return. Include
Schedule D, Form 8949, and Form 4797 if applicable to your farming income or fishing income.
Step 9: Verify Filing Status Compatibility
Confirm that your filing status appears properly on Form 1040 line 2. The income-averaging computation on Schedule J 2022 depends on the tax brackets applicable to your filing status, whether single, married filing jointly, married filing separately, head of household, or qualifying widow(er).
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: Sign and Date Your Return
Sign and date your completed Form 1040 and all attachments. Include the tax year designation
“2022” on all forms, and refer to the IRS where to file page for your applicable filing address or delivery method.
Income Excluded from Averaging
Elected farm income excludes several categories of receipts and transactions that do not qualify for the three-year lookback calculation. Income from land sales, development rights, and grazing rights does not qualify for income averaging regardless of connection to farming activities.
Any excess business loss allocable to your farming business or fishing business cannot appear in elected farm income calculations. Capital loss carryovers that did not reduce prior-year taxable income require adjustment through the base year taxable income worksheets.
Alternative Minimum Tax Considerations
The income averaging election does not apply when calculating the alternative minimum tax on
Form 6251. You do not need to refigure the tax liability of any minor child who previously used your tax rates in prior years because of your current-year Schedule J election.
For tax years 2021 through 2028, the excess business loss limitation rules replace the suspended excess farm loss limitation. Before calculating any excess business loss amounts that impact your elected farm income, you must apply at-risk limits and passive activity limits.
Form-Specific Limitations
Schedule J is available only to taxpayers with income derived from farming or fishing activities.
Taxpayers with no farm or fishing income in the current year cannot claim the income-averaging election.
Nonresident aliens engaged in farming or fishing businesses in the United States may use
Schedule J with Form 1040-NR. The same general eligibility rules apply to all taxpayers regardless of residency status.
Tax Planning Strategies
Income averaging provides the greatest benefit when the 2022 income substantially exceeds income levels from the three base years. This allows you to utilize lower tax brackets from those years and reduce your overall tax burden.
Calculate your tax liability both with and without Schedule J before making the final election.
Keep your completed 2022 return and all supporting schedules for use in potential income averaging elections on future returns for tax years 2023, 2024, or 2025.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
