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Schedule J

Schedule J

Income Averaging for Farmers and Fisherman

Use Schedule J (Form 1040) to elect to Figure the 2006 tax by averaging, over the previous 3 years, all or part of the 2006 taxable income from trades or business of farming or fishing. This election may give a lower tax of the 2006 income from farming or fishing is high and the taxable income for one or more of the 3 prior years was low.
 
Definitions:

  • Farming Business: A farming business is the trade or business of cultivating land or raising or harvesting any agricultural or horticultural commodity.  This includes operating a nursery or sod farm.  See IRS instructions of schedule J for details.
  • Fishing Business: A fishing business is the trade or business of fishing in which the fish harvested, either in whole or in part, are intended to enter commerce or enter through sale, barter, or trade.  This includes the catching, taking, or harvesting of fish.  See IRS instructions of schedule J for details.

Prior Year Returns:

  • The taxpayer may need copies of his prior year original or amended income tax returns for 2003, 2004, and 2005 to figure the tax on schedule J.
  • These returns are needed as on line 4,8 , 12 and 16 the user needs to insert the filing status in the combo box and tax is calculated from the worksheet attached  and value from a particular line of worksheets used flows on schedule J lines as tax for a particular year.

General Instructions:

Line 1: Taxable income
The package by itself flows the value from Form 1040 line 43 (or Form 1040NR line 40).

Line 2: Elected Farm Income

  • On this line amount is entered by the package from schedule F, schedule K-1P/S , and from Form 4835. TO figure the elected farm income, the taxpayer needs to figure his taxable income from farming or fishing. This includes all income, gains, losses and deductions attributable to any fishing or farming business. But it does not include gain from the sale or disposition of land.
  • Elected Farm income is the amount of taxable income from farming or fishing that  the taxpayer elects to include on line 2.the taxpayer may himself decide whether to include less than the full amount ,depending on how the amount the taxpayer includes on line 2 affects his tax bracket for the current and prior 3 tax years.
  • Elected farm income cannot exceed the taxable income. Also, the portion of his elected farm income treated as a net a capital gain cannot exceed the smaller of the total net capital gain or his total net capital gain attributable to his farming or fishing business. If the elected farm income includes net capital gain, he must allocate an equal portion to the net capital gain to each of the base years. If, for any base years the taxpayer had a capital loss carryover t the next year , he do not  reduce the elected farm income allocated to that base year by any part of the carryover.
  • Enter Other taxable farm and fishing income , excluding land sales, the taxpayer may have to include on schedule C or schedule D and form 4797.

Generally, income, gains, losses and deductions from farming or fishing are reported on :

  • Form 1040, line 7 to the extent of wages and other compensation the taxpayer received as a shareholder in a S corporation engaged in a farming or fishing business.
  • Schedule C or C-EZ
  • Schedule D
  • Schedule E part-II
  • Schedule F
  • Form 4797 
  • Form 4835

For more details refer instructions of schedule J.

Line 4: Tax calculation based on 2006 instructions:
The package by itself calculates the tax on amount of line3 as per 2006 tax table or tax computation worksheet.

For tax year 2003:

Line 5 to Line 8:

  • Select from the combo box filing status that you opted or selected for filing 2003 tax year return.
  • Read the instructions of schedule J line 5 for type of income to include on this line and enter manually the amount of your income as was reported on schedule J 2003 return.
  • The package by itself divides this year income reported on line 2 of this form by 3 for averaging.
  • If schedule J worksheet is added by the taxpayer the schedule J worksheet  calculates the amount as per 2003 tax calculation and enters on line 8 from worksheet for 2003 tax year amount from line 26 calculated as per 2003 tax table.

For tax year 2004:

Line 9 to Line 12:

  • Select from the combo box filing status that you opted or selected for filing 2004 tax year return.
  • Read the instructions of schedule J line 9 for type of income to include on this line and enter manually the amount of your income as was reported on schedule J 2004 return.
  • The package by itself divides this year income reported on line 2 of this form by 3 for averaging.
  • If schedule J worksheet is added by the taxpayer the schedule J worksheet  calculates the amount as per 2004 tax calculation and enters on line 12 from worksheet for 2004 tax year amount from line 19 calculated as per 2004 tax table.

For tax year 2005:

Line 13 to Line 16:

  • Select from the combo box filing status that you opted or selected for filing 2005 tax year return.
  • Read the instructions of schedule J line 13 for type of income to include on this line and enter manually the amount of your income as was reported on schedule J 2005 return.
  • The package by itself divides this year income reported on line 2 of this form by 3 for averaging.
  • If schedule J worksheet is added by the taxpayer the schedule J worksheet  calculates the amount as per 2004 tax calculation and enters on line 16 from worksheet for 2005 tax year amount from line 37 calculated as per 2005 tax table.

Line 17 to line 22:

  • On line 17 the package does the sum of lines mentioned on the form.
  • On line 18, line 19, and line 20 enter manually the amounts as given in the instructions on the form schedule J itself regarding income exclusion and inclusions.
  • On line 21 the package does the sum of lines mentioned on the form.
  • Finally on line 22 the net amount of tax is calculated by subtracting line 21 form line 17.
  • This line 21 is then reported on Form 1040 Line 44 (or Form 1040NR line 41).

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