IRS Form 1040 (Schedule J) – IRS Forms, Instructions, Pubs 2026

IRS Form 1040 (Schedule J) – IRS Forms, Instructions, Pubs 2026 – Farmers and fishermen often face highly variable income due to weather, market prices, crop yields, and other uncontrollable factors. The IRS provides a valuable tax-saving tool through Schedule J (Form 1040), officially titled “Income Averaging for Individuals With Income from Farming or Fishing.” This allows eligible individuals to average part or all of their current-year farm or fishing income over the current year and the three prior years, potentially lowering their overall tax bill by applying lower tax rates from years with less income.

Download the current form here: IRS Schedule J PDF. For detailed guidance, see the 2025 Instructions for Schedule J.

This guide covers eligibility, how it works, step-by-step filing instructions, benefits, and tips for tax year 2025 (returns filed in 2026).

Who Can Use Schedule J for Farm or Fishing Income Averaging?

You can elect income averaging on Schedule J if you have taxable income from a farming or fishing business in 2025. No requirement exists to have operated the business in the prior three “base years” (2022, 2023, and 2024), and your filing status can differ across years.

Farming business includes:

  • Cultivating land or raising/harvesting agricultural or horticultural commodities.
  • Operating nurseries, sod farms, or orchards.
  • Raising or harvesting fruit-, nut-, or crop-bearing trees (with limits on certain evergreens).
  • Raising, feeding, or managing livestock and animals.
  • Share-based land leases to tenants under a pre-activity written agreement.

Fishing business includes:

  • Catching, harvesting, or attempting to harvest fish (finfish, mollusks, crustaceans, and other marine life except mammals and birds).
  • Supporting sea operations or preparatory activities.
  • Share-based vessel leases under a written agreement.
  • Crew compensation based on a share of the catch or proceeds.

Exclusions apply: Contract harvesting for others, buying and reselling others’ products, or scientific research vessels do not qualify. Only individuals (including pass-through entities like partnerships, S corps, or LLCs) may use it—estates, trusts, and C corporations cannot. Combine farming and fishing income if both apply.

Note: The 2/3 gross income test or 5-out-of-10-years requirement sometimes mentioned in older sources does not apply to Schedule J eligibility. Those rules relate to estimated tax penalties or other provisions.

What Is Elected Farm Income (EFI)?

Elected Farm Income (EFI) is the portion of your 2025 taxable income from farming or fishing that you choose to average (enter on line 2a of Schedule J). It cannot exceed your total taxable income on Form 1040.

EFI includes:

  • Income, gains, losses, and deductions from your farming/fishing business (e.g., from Schedule F, Schedule C, Form 4797 for asset sales, etc.).
  • Gains or losses from selling or disposing of property (like equipment or buildings) used regularly in the business for a substantial period (sale within one year of cessation is generally reasonable).
  • Attributable self-employment tax deductions and certain other items.

EFI excludes:

  • Gains or losses from selling land or development/grazing rights.
  • Wages received as an S corporation shareholder (in most cases) or non-qualifying crew pay.

You can elect any amount up to the full EFI (including zero) to optimize tax brackets—partial averaging often works best.

For capital gains in EFI, Schedule J has special lines (2b and 2c) to handle qualified dividends, long-term capital gains, and unrecaptured Section 1250 gain at preferential rates.

How Does Farm Income Averaging Work?

Schedule J reallocates one-third of your EFI to each of the three base years (2022, 2023, 2024). It then recalculates the tax on the increased income for those years using the tax rates, brackets, and rules from each base year.

The IRS compares the total “averaged” tax (current year tax on non-EFI income + taxes on the three augmented base years) to your regular 2025 tax without averaging. You pay the lower amount. This “fills up” lower tax brackets from leaner prior years.

Key points:

  • It affects only regular income tax (not Alternative Minimum Tax on Form 6251).
  • Negative taxable income in base years can be used (with worksheet adjustments for NOLs and capital losses).
  • Prior Schedule J elections require carrying over specific amounts from those forms.
  • Nonrefundable credits apply after the averaged tax is determined.

Step-by-Step: How to Fill Out Schedule J (Form 1040)?

  1. Line 1: Enter your 2025 taxable income from Form 1040, line 15.
  2. Line 2a: Enter your elected farm income (EFI).
  3. Lines 2b–2c: Report any net capital gain and unrecaptured Section 1250 gain included in EFI.
  4. Line 3: Subtract capital gain portions if applicable; this is ordinary income to average.
  5. Line 4: Compute tax on line 3 using 2025 tax rates/worksheets.

For each base year (2022 on lines 5–8, 2023 on 9–12, 2024 on 13–16):

  • Enter adjusted taxable income from that year’s return (or use Taxable Income Worksheet if zero or negative).
  • Add one-third of EFI.
  • Compute tax using that year’s rates and appropriate worksheets (including capital gain allocations).
  • Line 17: Add the four tax amounts (current + three base years).
  • Lines 18–23: Add any additional taxes, subtract the sum of base-year taxes without EFI, and arrive at your final tax (enter on Form 1040, line 16).

Use worksheets in the instructions for negative base-year incomes, foreign earned income (Form 2555), or prior Schedule J usage. Tax software often automates this.

Example of Schedule J (Form 1040) layout from IRS resources.

Benefits of Using Schedule J

Income averaging shines when 2025 brings a strong harvest or fishing season after lower-income years. It can:

  • Reduce your marginal tax rate on the averaged income.
  • Lower self-employment tax impact indirectly.
  • Provide significant savings (thousands of dollars in some cases) without amending prior returns.

Hypothetical example: A single farmer with $90,000 EFI in 2025 and low/zero taxable income in 2022–2024 might spread $30,000 per base year, taxing much of it at 10–12% brackets instead of 22–24% or higher.

Common Mistakes to Avoid and Pro Tips

  • Forgetting records — Keep prior-year returns (use Form 4506 or 4506-T for copies/transcripts).
  • Over-electing EFI — Test partial amounts; software helps compare scenarios.
  • Ignoring capital gains treatment — Allocate them properly for 0%/15%/20% rates.
  • AMT interaction — Averaging doesn’t reduce AMT; calculate both ways.
  • State taxes — Many states conform, but check your state’s rules.

Tax preparation software (TurboTax, H&R Block, etc.) usually includes Schedule J logic. For complex situations (large asset sales, NOLs, or multiple entities), consult a tax professional familiar with agriculture or commercial fishing.

Frequently Asked Questions (FAQs)

  1. Can fishermen use Schedule J?
    Yes—qualifying fishing income is treated the same as farm income.
  2. Do I have to use it every year?
    No. The election is made annually by attaching Schedule J. You can choose not to use it in future years.
  3. What if a base year had a loss?
    Worksheets allow negative amounts, which can increase savings.
  4. Does it affect Social Security or other benefits?
    It generally does not change prior-year AGI for benefit calculations, as it doesn’t amend returns.
  5. Where do I attach Schedule J?
    Attach it to your Form 1040, 1040-SR, or 1040-NR when e-filing or mailing.

Final Thoughts: Is Schedule J Right for You?

For farmers and fishermen with fluctuating income, IRS Schedule J offers a straightforward way to smooth tax liability and keep more money in your operation. Always download the latest form and instructions from IRS.gov, as rules can update.

Farmers and fishermen benefit from tools like income averaging to manage volatile earnings.

For personalized advice, work with a qualified tax advisor or enrolled agent experienced in agribusiness or commercial fishing taxes. Check IRS Publication 225 (Farmer’s Tax Guide) for additional farming-specific guidance.

Resources:

This article is for informational purposes only and is not tax advice. Tax laws change; verify with official IRS sources or a professional for your situation.