incomeaverage


	Return to TFB Main Page Return to Texas Agriculture Archive November 17, 2000 IRS makes change in income averaging rules


	A change in the way farm income averaging works will save taxes for farmers and ranchers who use income averaging and have negative taxable income. Farm Bureau had recommended the change last January during the comment period on income averaging rules. The new 2000 IRS Publication 225, "Farmer's Tax Guide," says that farmers and ranchers will now be able to use a negative income figure in the income averaging calculation. In addition, farmers will be able to amend tax returns for 1998 and 1999 to take advantage of the new rules. (The first year that farm income averaging was allowed was 1998.) Examples illustrating the difference between using income averaging with and without the use of a negative base tax year are shown.
		INCOME AVERAGING ILLUSTRATIONS
	The following example illustrates the difference between using income averaging with and without the use of a negative base tax year. EXAMPLE for joint return without using income averaging: A total of $22,495 in taxes are due for 1998 if income averaging were not used.
									1998											1997												1996					1995
Actual Farm Income					$100,000											$20,000										($20,000)									$20,000
1998 Taxes Due						$ 22,495
				$42,350 X 15% $ 6,353 $57,650 X 28% $16,142
			EXAMPLE for joint return with income averaging using a negative income number: A total of $18,000 in taxes are due in 1998 if $60,000 of farm income is averaged over the previous three years and a negative income number is allowed. The $60,000 must divided equally over the previous three years.
														1998										1997									1996										1995
			Actual Farm Income								$100,000										$20,000								($20,000)													$20,000
							$100,000 - 60,000 $ 40,000										$20,000 +20,000 $40,000										($20,000) +20,000 $0											$20,000 +20,000 $40,000
			Averaged Farm Income				$100,000 - 60,000 $ 40,000										$20,000 +20,000 $40,000										($20,000) +20,000 $0											$20,000 +20,000 $40,000
										$18,000 as calculated below
			1998 Taxes Due							$18,000 as calculated below
										$40,000 X 15% $6,000							$40,000 X 15% +$6,000														$0 X 15% $0												$40,000 X 15% +$6,000
			EXAMPLE for joint return with income averaging without using a negative income number: A total of $21,000 in taxes are due in 1998 if $60,000 of farm income is averaged over the previous three years without using a negative income number. The $60,000 must divided equally over the previous three years.
																									1997															1995
															1998
															1998																			1996
			Actual Farm Income									$100,000										$20,000						($20,000)											$20,000
								$100,000 - 60,000 $40,000										$20,000 20,000 $40,000												$0 +20,000 $20,000						$20,000 +20,000 $40,000
			Averaged Farm Income					$100,000 - 60,000 $40,000										$20,000 20,000 $40,000												$0 +20,000 $20,000						$20,000 +20,000 $40,000
			1998 Taxes Due																$21,000 as calculated below
													$40,000 X 15% $6,000										$40,000 X 15% +$6,000							$20,000 X 15% +$3,000											$40,000 X 15% $6,000