Irom step 5 H the total from step 4 is smaller then 

 income averaging will be advantageous. 



Example: Andy Farmer, who is married, filing 

 jointly, has both farm and non-farm income for the last 

 four years as shown in Table I . Net losses are within 

 parentheses. If Andy does not elect income averaging 

 then the family income tax liability for 1998 will be 

 $32,346. [. 1 5 X $42,350 + .28 x ($ 1 02,300 - $42,350) 

 + .31 x ($132,000 - $102,300)]. Andy can elect to 



average up to $ 1 1 7,000 of 1 998 income (the total of the 



Schedule F and Form 4797 amounts). If he elects to 



average $90,000, then $30,000 is added to the taxable 



income of 1995, 1996 and 1997. Results of averaging 



are shown in Table 2. 



Note that if Andy elects 



to income average in 



1999 the amounts in 



Table 2 become the 



initial taxable incomes. 



The saving from 



averaging is $12,546 [= 



$36,096 - $23,550]. The 



1998 tax liability is 



$19,800 [$23,550 -$900 



-$1,200 -$1,650]. Note: 



the tax is figured at 15% 



of taxable income. U.se 



of tax tables will give 



slightly different answers 



($4 more m each case). 



The operational rule is to increase the amount of 

 the election as long as the average marginal tax rate 

 over the three prior years is as low or lower after 

 averaging than the marginal rate on the income 

 remaining in 1998. In the example, the last dollar of 

 taxable income before averaging (Table 1 ) in each of 

 the prior years is taxed at 15%, against the marginal 

 rate for 1998 of 31 %. Therefore, moving $3 from 1998 

 to the prior years reduces the tax rate on that income 



from 31% to 15%. After 

 averaging (Table 2) the 

 marginal rates are 15% 

 throughout. 



If the election was 



increased by more than 



$600 (to over $90,600) 



this would bring 1997 



taxable income over 



$41,200, increasing the 



marginal rate of tax in 



1997 to 28%. Now the 



average marginal tax 



rate of the three prior 



years (15% -i- 15% -f- 



28%)/3 = 19.3%> exceeds 



the marginal rate for 



1 998, which has dropped 



to 15%. 



Caution: If you are subject to alternative minimum 



tax in the year for which averaging is elected ( 1 998 in 



the example) then income averaging will be of no 



benefit. 



Fruit Notes, Volume 63 (Number 2), Spring, 199cS 



