Farm Income Averaging

[Corduroy Frog]

In southern middle Tennessee, there was a severe drought.  This led to farmers selling much of their livestock, and also USDA issued money to the farmers for Drought Relief.  The effect of this causes farm income to uncharacteristically rise.  I am trying to deal with Schedule J income averaging.

The first entry is for farm income - meaning Sch F and everything else which may attach, e.g. 4797, capital gains, fishing, etc.  But the first entry leads us to believe the amount of income is an "election."

Question:  If the farm income is defined, what other income can be "elected" for the previous 3 years.   Election usually implies the taxpayer may have an advantage by making a choice.  I've read the IRS instructions and still can't figure this out.

Thanks in advance for any suggestions or comments.

[Catherine]

No clue, but will follow this thread as I have a farm (not in TN) that may need something similar. They're going to be on extension, so I wasn't worried about it all quite yet. 

[kathyc2]

1 hour ago, Corduroy Frog said:

Question:  If the farm income is defined, what other income can be "elected" for the previous 3 years.   Election usually implies the taxpayer may have an advantage by making a choice.  I've read the IRS instructions and still can't figure this out.

You can't elect other income.  However, it may be an advantage to not elect the full amount of 2024 farm income.  What it does it take the elected amount, divide by 3 and then recalculate what the 2021, 22, and 23 tax would have been with that extra 1/3 added on to taxable income for those years.

For example, say the prior 3 years taxable income was in 12% marginal rate.  2024 alone has 60K in 22% rate.  That would likely be the optimal to elect.  If wouldn't do you any good to shift more to prior years as that may put some or more in 22% rate in the recalculation while not taking full advantage of 2024 12% marginal rate.  The calculation would then be 2024 at 12% marginal and as long as there is 20K per year in prior years room before 22% is hit, essentially all the 2024 income is taxed at 12% 

[Corduroy Frog]

Wonderful explanation, Kathy.  Thank you.

[DANRVAN]

It is not really income averaging, it is actually tax bracket averaging.

You have to play around with the elected amount to determine the optimal amount.

Also input any LTCG over STCL and unrecap  1250 gains on lines 2b and 2c that were included in the elected amount so they will not be included.

[Gail in Virginia]

In the back of my mind, I am remembering that farmers can defer reporting sales of livestock during a drought until the following year.  Have you looked into that as well?

[kathyc2]

2 hours ago, Gail in Virginia said:

In the back of my mind, I am remembering that farmers can defer reporting sales of livestock during a drought until the following year.  Have you looked into that as well?

You are probably thinking of this:  https://www.irs.gov/pub/irs-drop/n-24-70.pdf

[DANRVAN]

22 minutes ago, kathyc2 said:

You are probably thinking of this:  https://www.irs.gov/pub/irs-drop/n-24-70.pdf

There are two special rules, that one if for the replacement of breeding stock sold on account of drought under sec 1033.  If they are not replaced under the prescribed period, then the original return must be amended.

The second special rule falls under sect 451.  That allows for a one year deferral of livestock that normally would not be sold until the follow year due to a federally declared drought.