What is IRS income averaging?


Quick Answer

Income averaging, available to some farmers and fishermen, lets taxpayers average their income over multiple years, evening out the variable income these professions often experience from year to year, states TurboTax. As of 2015, qualified farmers or fishermen use Schedule J to average farming and fishing income.

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Full Answer

By using income averaging, if a farmer or fisherman has a good year following a bad year, he is not penalized with an exceptionally higher tax rate on the better year's income, which helps reduce the burden of variable yearly income, states TurboTax. The IRS considers farming businesses to be those that are involved in cultivating land or the raising and harvesting of any agricultural product. However, the IRS excludes resellers and harvesters under contract. The IRS also considers landowners who lease land to farmers eligible if their rent is based on agricultural yields.

The IRS considers fishing businesses eligible for income averaging if they catch or harvest marine life, excluding mammals and birds, explains TurboTax. The IRS also allows income averaging by crew members and owners of commercial fishing vessels if their income agreements are based on a share of the catch.

The IRS provides printable versions of Schedule J on its website, IRS.gov. Click the Forms & Pubs link on the home page, and search for Schedule J under the Find All Current Forms & Pubs link.

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