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Anne
Anne, Master Tax Preparer
Category: Tax
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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we are farmers. had a wonderful year. need to income average.

Resolved Question:

we are farmers. had a wonderful year. need to income average. i also have a home based business, and the farm pays me a salary. never had to fill out a sch j in my life. when it asks for line 43 on previous returns and current return, do i use only farm income or is my farm wage income and my business included in that? also im not really understanding the "elected farm income" thing! please help.
Submitted: 4 years ago.
Category: Tax
Expert:  Anne replied 4 years ago.
HiCustomerbr />
Thank you for using justanswer. Schedul J is very similar to a "lump sum social security" payment. Both are designed to help a tax payer "spread out" their income as if they had recieved the income in prior years when they're tax liability might have been lower as opposed to receiving it all in one year (which they did) and jumping their tax bracket for that year.

Schedule J is used to recalculate the prior 3 years taxes with a portion of the farming income from the current year. NOTE: this may not, in the end, save the taxpayer any tax, and he may find its better to just include all of the income in his current year's return. Unfortunately, I've never been able to figure our a way to know that completely without doing the form.

when it asks for line 43 on previous returns and current return, do i use only farm income or is my farm wage income and my business included in that?

When it asks for line 43 of ANY tax year, they are asking you for the taxable income that year. That taxable income will include wages, farm income/loss, interest, etc.

I'm not really understanding the "elected farm income" thing!

The "elected farm income" is not cut and dried. The first thing you want to do is fill out the tax return with all of the farm income included, and see if that jumps the tax payer from one tax rate to the next. If it doesn't, then Schedule J may not help them anyway.

However, if counting all of the farm income this year does jumpt them a tax bracket (or 2), that's when Schedule J comes in. The place I usually start is with the $ amount that caused the tax payer to jump to the next bracket. For ex: the 2009 tax rate for a couple filing joint is 15% up to $67,899. At $67, 900 the tax bracket jumps to 25%. (Remember, we're talking about Taxable Income, after exemption allowances, standard deductions, etc)

If your client has taxable income of $72,000, they are only over the 15% bracket by $4100, so if they have at least $4100 in farm income, you can start with the $4100 as your "elected farm income"

You would then divide the $4100 by 3, and you would add that number ($367) to the taxable income for the prior 3 years. If they're taxable income in those years was lower than this year, and if the $367 you're adding to that income only increases their tax at 15% instead of the 25% they would have to pay on it this year, then this would be a benenfit to them.

You do not amend any back years. You simply figure the difference in the actual tax and reconcile those years on the Schedule J.

This is a failry simplistic example, but I just wanted to give you the theory.

I'm linking you to the instructions, you'll have to copy and past the web address into your web browser ( I'm pretty sure you already had them, but just in case)

http://www.irs.gov/instructions/i1040sj/ch01.html


I hope this helps.




 

Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1699
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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