Income Averaging for Farmers and Fishermen 2023
Checklist
Schedule J allows eligible farmers and fishermen to average farm or fishing income over three prior taxable years, reducing tax liability when current-year income spikes. Individuals with farm or fishing income can use this election, including partners in partnerships and shareholders in S corporations who average their distributive share on their personal income tax return.
Eligibility Requirements
Any individual engaged in a farming or fishing business during the current tax year qualifies for income averaging. The Internal Revenue Code does not impose a minimum percentage or gross income test for eligibility.
You can elect to use Schedule J even if you had no farm or fishing activity during the three prior base years. Partners receiving Schedule K-1 distributions from passthrough farm entity operations may average their share of income on their individual tax return.
Nonresident aliens engaged in farming or fishing businesses in the United States may use
Schedule J by attaching it to Form 1040-NR. S corporation shareholders with farming income allocations also qualify for this election.
C corporation entities cannot use this election because the Internal Revenue Code limits
Schedule J to individual taxpayers only. Resident aliens and U.S. citizens filing Form 1040 or
Form 1040-SR can elect income averaging when they report taxable income from farming or
fishing operations.
How to Complete Schedule J for the 2023 Tax Year
Step 1: Gather Three Prior Year Tax Returns
Obtain complete copies of tax returns filed for the three prior taxable years immediately preceding the current year. You need these returns to extract prior-year adjusted gross income figures and net farm or fishing income amounts for Schedule J calculations.
Prior year returns provide the baseline income data that determines whether averaging produces tax savings compared to calculating tax liability using current-year rates alone. Keep
all prior year records for at least three years after filing your 2023 tax return to support your income averaging calculations.
- Schedule F (Profit or Loss from Farming) is required to report crop sales, livestock
- Schedule C (Profit or Loss from Business) applies when fishing activities are reported as
- Form 4797 (Sales of Business Property) reports sales of farm equipment and other
- Schedule K-1 forms document farm or fishing income received from partnerships or S
- Commodity sales receipts provide documentation for grain, livestock, or fish sales made
- Fuel tax credit calculations and supporting records substantiate the off-highway business
Step 2: Collect Current-Year Farm and Fishing Documentation
Compile records showing your 2023 net farm or fishing income before preparing Schedule J.
Required records include the following items: income, and deductible farm expenses for the tax year. a business and is used to document related income and expenses. depreciable assets used in farming or fishing operations. corporations and must be included when passthrough income is reported. throughout the year. use of fuel claimed during the tax year.
Step 3: Calculate Elected Farm Income
Your elected farm income entered on Schedule J Line 2a represents the portion of taxable income you choose to average over the three-year period. You do not have to include all farming or fishing income on this line.
Consider including less than your entire farm income if a partial election keeps you in lower tax brackets across all four years involved in the calculation. This strategic approach may produce greater tax savings than averaging your complete farming or fishing income amount.
Step 4: Complete Schedule J Lines and Calculate Tax
Enter your 2023 taxable income from Form 1040, Form 1040-SR, or Form 1040-NR Line 15 on
Schedule J Line 1. Report your elected farm income on Line 2a, ensuring this amount does not exceed the taxable income shown on Line 1.
If your elected farm income includes net capital gain, you must complete Lines 2b and 2c to report the capital gain portion separately for proper tax calculation. Calculate tax on current-year income excluding the elected farm amount using 2023 tax rates, then figure tax on prior-year income plus one-third of elected farm income using 2020, 2021, and 2022 tax rates.
Complete all lines following the sequence provided in the 2023 Schedule J instructions. Lines 5,
9, and 13 require you to enter taxable income or prior Schedule J amounts from 2020, 2021, and 2022 returns.
If any prior-year taxable income was zero or less, use the special worksheet provided in the instructions to calculate the correct amount. Line 23 shows your final tax after income averaging, which you transfer to Form 1040 Line 16 only if averaging produces a lower tax than calculating without Schedule J.
Step 5: Attach Schedule J to Your Tax Return
Attach Schedule J to Form 1040, Form 1040-SR, or Form 1040-NR when you file your 2023 return. Include Schedule F or Schedule C showing your current-year farm or fishing business results.
Add all supporting schedules such as Schedule D for capital gains, Form 4797 for asset sales, and any Schedule K-1 forms documenting passthrough income allocations. Sign and date both
Form 1040 and Schedule J in the spaces provided.
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Step 6: Determine Filing Address and Submit Return
Use the ‘Where to File’ guidance in the Form 1040 instructions to determine your proper submission address based on your state and whether you enclose payment. Schedule J follows the same mailing address as your main return because it files as an attachment rather than a separate submission.
The form includes Attachment Sequence Number 20 for reference, but you should follow the general assembly order guidance provided in the standard Form 1040 instructions. Submit Form
1040, Schedule J, Schedule F or C, and all supporting schedules as one assembled return.
Special Filing Situations
Married couples filing separately each file their own complete Form 1040, Form 1040-SR, or
Form 1040-NR. When both spouses have farm or fishing income and choose income averaging, each attaches their own Schedule J to their respective separate return.
Form 6251 (Alternative Minimum Tax) calculations do not incorporate Schedule J elections.
Calculate any alternative minimum tax liability using your regular taxable income without applying income averaging adjustments.
You may need to compare your tax liability under both regular tax with Schedule J and alternative minimum tax to determine your final tax owed for 2023. Both spouses must sign if you file a joint return with Schedule J attached.
Prior Year Schedule J References
If you used Schedule J in any of the three prior years, you must reference specific line amounts from those earlier Schedule J forms when completing your 2023 election. The instructions guide you to carry forward amounts from previous Schedule J filings rather than using the standard taxable income lines from Form 1040.
These carryforward requirements ensure accurate calculation of your base-year tax amounts when you spread current-year farm income backward into prior tax years. Follow the line-by-line instructions carefully to identify which prior Schedule J amounts transfer to your 2023 form.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
