Income Averaging for Farmers and Fishermen 2020
Checklist
Schedule J attached to Form 1040 allows eligible farmers and fishermen to average farm or fishing income over three years under Internal Revenue Code Section 1301. This election can reduce tax liability caused by income spikes from weather conditions, market volatility, and seasonal patterns common to agricultural and fishing operations.
For 2020, this form applies only to individuals with farming business or fishing income activity, and the schedule requires a three-year lookback income reconstruction regardless of prior-year filing status. The form operates under permanent IRC Section 1301 income averaging rules without year-specific program modifications for 2020.
Eligibility Requirements
You qualify to use IRS Form 1040 Schedule J if you had taxable income from your trade or business of farming or fishing for the current tax year. The Internal Revenue Service does not require farming or fishing to be your largest source of income.
Schedule J is restricted to individuals with taxable income from farming business or fishing income; corporations and partnerships cannot directly file Schedule J. Individuals who are partners in partnerships or shareholders in S corporations engaged in farming or fishing businesses may use Schedule J to average their distributive share of farm or fishing income on their individual income tax return.
You do not need to have been in the business of farming or fishing during any of the base years to make this election. Nonresident aliens may file Schedule J only if they elected to be treated as United States residents for tax purposes under applicable Internal Revenue Code sections referenced in Schedule J 2020 instructions.
Required Documentation and Records
Gather complete income records for the current year and the three preceding tax years. For
2020 Schedule J, you need documentation for 2020, 2019, 2018, and 2017.
Collect the following forms and schedules
- Schedule F for farm income reporting
- Schedule C for fishing business income
- Schedule K-1 forms from farm partnerships or S corporations
- Form 4835 for farm rental income
- Schedule E, Part II, for partnership and S corporation income
- Form 4797 for sales of business property
- Any applicable capital gains schedules
You may need copies of your original or amended income tax returns for the three base years to figure your tax on Schedule J. The Internal Revenue Service provides Form 4506 to request copies of prior tax returns for a fee, or you can use Form 4506-T to obtain free transcripts.
Calculate or obtain the net profit or loss from Schedule F or Schedule C for each of the three tax years immediately preceding the current year. Keep all records for at least three years after April
15, 2021, or the date you file your 2020 tax return if later.
Completing Schedule J: Step-by-Step Process
Step 1: Enter Total Taxable Income
Record the taxable income from your 2020 Form 1040 on line 1 of Schedule J. This amount represents your total taxable income before income averaging adjustments.
Step 2: Determine Elected Farm Income
Enter current-year elected farm income on line 2a as instructed in the Schedule J 2020 form and instructions. You are not required to include all of your taxable income from farming or fishing on this line.
Elected farm income is the amount of your taxable income from farming or fishing that you elect to average. Complete lines 2b and 2c if your elected farm income includes net capital gains from your farming business or fishing income operations.
Step 3: Calculate Non-Averaged Income
Subtract line 2a from line 1 and enter the result on line 3, which represents your taxable income excluding the elected farm income. Figure the tax on line 3 using 2020 tax rates and enter the result on line 4.
Step 4: Enter 2017 Base Year Information
Record your 2017 base year taxable income on line 5 following the specific instructions for prior
Schedule J usage or original tax return amounts. If you used Schedule J in 2019, enter the amount from your 2019 Schedule J line 11.
Step 5: Calculate One-Third Allocation
Divide the elected farm income from line 2a by 3.0 and enter the result on line 6. This amount represents the one-third allocation to each base year.
Step 6: Process 2017 Base Year Calculation
Add the amount from line 6 to your 2017 taxable income and enter the total on line 7. Calculate the tax on line 7 using 2017 tax rates and enter the result on line 8.
Step 7: Process 2018 Base Year Calculation
Enter your 2018 base year taxable income on line 9, add the one-third allocation from line 6, and record the combined amount on line 11. Calculate the tax on line 11 using 2018 tax rates and enter the result on line 12.
Step 8: Process 2019 Base Year Calculation
Enter your 2019 base year taxable income on line 13, add the one-third allocation from line 6, and record the combined amount on line 15. Calculate the tax on line 15 using 2019 tax rates and enter the result on line 16.
Step 9: Sum All Calculated Taxes
Add lines 4, 8, 12, and 16, then enter the total on line 17. This amount represents the sum of all taxes calculated using the income averaging method.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: Complete Final Reconciliation
Enter prior-year taxes on lines 19 through 21, total them on line 22, and subtract line 22 from line 18 to determine your final tax liability on line 23. This final amount reflects your tax benefit from income averaging.
Form Assembly and Submission
Ensure Schedule J is completed in full with your name and Social Security number clearly shown. Attach Schedule J to your Form 1040, Form 1040-SR, or Form 1040-NR in the sequence required by assembly instructions.
Include all required supporting schedules, such as Schedule F, Schedule C, or Schedule E Part
II, with your complete tax return package. You may need to attach reconstructed schedules if you are recalculating prior-year income amounts.
Your tax may be less if you figure it using the standard 2020 tax table or applicable worksheets rather than this method. Attach Schedule J only if it is used to determine your tax liability.
Submit your complete Form 1040 package with Schedule J and all required attachments following the Internal Revenue Service's "Where to File" instructions for your specific filing location. Keep copies of your 2020 income tax return and Schedule J for use in income averaging calculations for 2021, 2022, or 2023 tax years.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
