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Income Averaging for Farmers

Stevenson G. Smith, CPA

September 20, 2012

Farmers have one tax advantage no longer available to other individual taxpayers.  They can claim income averaging if their current year’s elected farm income is 40% higher than the average of the three.  In other words if someone has a year with higher than usual farm income that rather than paying all the tax in one year at a higher rate, they can average the income for three years and pay on the average amount each year. 

In the current year the taxpayer must be considered to be engaged in the business of farming, but is not required to have been in the farming business in the three prior years in order to use the income averaging.  Services as a farm employee are disregarded in determining whether an individual is engaged in a farming business; however wages for an S corporation stockholder is included when considering farming business.  Gains or losses from disposition of farm property other than land can be designated as elected farm income.

Income averaging could be used in the year end tax planning especially if there were a choice of making a sale in the current year or waiting to make the sale in the following year. There would be a definite tax savings if the averaging changes the tax bracket and the current income is taxed at a lower rate.

Corporations, partnerships, S corporations, estates, and trusts cannot use farm income averaging.  The partners of partnerships or stockholders of S corporations can however use their share of income for averaging.

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