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
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