What is Farm Income Averaging?

cow-1014210_960_720As is often the case, farm related tax returns have advantages over other businesses when it comes to Federal income tax.  One of those unique options available to farmers is called income averaging.  Income averaging gives farmers the option of shifting some farm-related taxable income from this years’ taxable income to the three previous tax years, called base years.  You may elect to use farm income averaging if, in the year of the election, you are engaged in a farming business as an individual, a partner, or a shareholder of a Sub S Corporation.

It works like this.  Upon calculating your farm net income, you may elect to shift some amount of this income from this year’s income that you would prefer not to include in taxable income.  You may shift any or all farming net income to the three previous years (and three previous years only) evenly.  You may not pick and choose the years or amounts that you would like to shift to.  Again, you must shift to the three previous years, and you must shift evenly to those years.

Farm income is defined as the net income from your farming business – which is the total of farm income or gain minus any farm deductions or losses allowed as deductions in computing your taxable income.  Self-employment taxes due from this year’s farm net income, and self-employment taxes as a result of the three base years are unaffected by the farm income averaging calculations.  In other words, self-employment tax is determined before any income shifting utilized by the farm income averaging method.

Ultimately, the purpose of this tax planning technique is to shift this year’s higher tax bracket income to the base years’ marginal tax brackets.  In other words, tax preparers should be looking to shift taxable income due from farm income to previous years income to the extent that marginal tax bracket benefits may be available.  Remember, the taxable income shifted from current year income will be equally shifted to the three prior years.  Shifted income will be divided by three, and added to the three prior years.  This may result in a benefit, and it may not.  Generally, the taxpayer will find benefit when base years (three years prior) have average marginal rates that are lower than this year’s marginal rate.

Finally, it is important to note that farming net income is not necessary to be present in the three base years.  Only net farming income is necessary in the current year, and may be applied evenly to the three prior base years, even if farming income doesn’t exist in those three base years.

Charitable Contribution Deduction – Who Can I Give To?


Myths and half-truths abound when it comes to charitable contributions, and the tax benefits available because of them.  Some folks would suggest that donors should donate because they believe in the charity, not because of the tax benefits.  While there is some truth in this statement, it’s not wholly true.  In fact, some donors freely […]

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What To Do If You Haven’t Filed a Tax Return In Years


Almost every year, I get to speak to a client who hasn’t filed for years.  Sometimes it’s just a couple of years, sometimes it’s more.  Sometimes it’s a lot more.  The questions are generally the same.  What will the IRS do to me?  Can I keep on going thru life without filing?  Will I go […]

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A Quick Look at Bernie Sanders’ 2014 Tax Return

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As of April 15, 2016 Presidential hopefuls Bernie and Jane Sanders released their 2014 Federal Income Tax Return.  Turns out Hillary’s charge for Bernie to issue his tax returns was only political posture.  And, Bernie was right.  His return is boring. Sanders reported a W-2 income from his job as a U.S. Senator from Vermont, […]

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Five Tax Extension Myths


Every April we run across several tax clients who are bumping up against the filing deadline of April 15.  For those taxpayers, there are no options.  Get your 1099’s and W-2’s in, get it to the tax preparer and hope like crazy that the taxes are completed and filed on time.  That’s the game for […]

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2016 Filing Deadline Day


Due to an obscure holiday in Washington DC called ‘Emancipation Day’, the 2016 tax season deadline has been moved from April 15 to April 18.  This holiday is typically celebrated on April 16, but the 16th falls on a Saturday in the 2016 Calendar year.  That means the Federal tax deadline is pushed to the […]

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Beware of Fake “IRS” Telephone Calls!


Reuters reported a couple of days ago about a  continuing IRS scam.  The incoming call from the scammer goes something like this.  First, the ringing phone will show a pseudo IRS caller ID reference, falsely prepping the victim who is about to answer the phone.  Once answered, the listener may hear some sort of call-center-type […]

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Is Permanant Life Insurance a Bad Deal?


As I have written in earlier posts, life insurance is the Swiss Army knife of financial planning.  And, for those who have fiddled with a Swiss Army knife, they will notice the many options available.  Corkscrew, Phillips Screwdriver, Allen Wrench, general purpose knife, and bottle openers can almost always be found on any Swiss Army […]

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Tax Season Delayed for One to Two Weeks


It appears that the recent government shut-down will have effects carrying into the 2014 tax filing season.  The IRS recently announced that they will begin accepting tax returns no earlier than January 28 – the date could actually be pushed back into the first week of February.  The original beginning receiving date was January 21, […]

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Who is a Dependent? – 2013 Income Tax


One of the most frequently asked questions of a tax preparer is this:  Can I claim so and so?  The answer depends on a few questions, and is important, as each dependent exemption reduces the filer’s taxable income by $3,900.  Whether your dependent is really a ‘dependent’ also determines issues like the Child Tax Credit, […]

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