Income Averaging – or Your Ticket to the Past

Today TaxMama hears from June in California who asks. “My son-in-law suggested that I use income averaging to offset high income tax for 2007 resulting from circumstances beyond my control. Is that possible?”

Good Grief, June,

Just how old IS your son-in-law? He’s got a very long memory.

There used to be an option to reduce your taxes by using the average of the previous 3 years worth of income to compute your tax. That was on Schedule G.

But income averaging was eliminated by the Tax Reform Act of 1986 – when President Reagan simplified the Internal Revenue Code. http://www.whitehouse.gov/history/presidents/rr40.html

You should have seen the layer of dust on my 1985 Package X (the IRS forms book for tax pros). Before tax simplification, Package X was only one paperback, less than half an inch thick. The last time Package X was published, there were two thick books. Now, it’s all on disk – so we don’t see how many forms there really are!

But I digress. Let me get past the flood of memories of being able to do a complete tax return with pencil, instead of computer.

Sorry, June. You cannot income average to reduce the impact of a year with a burst of high income.

Well, you can if you’re a farmer – use Schedule J http://www.irs.gov/pub/irs-pdf/f1040sj.pdf
Or if the income was caused by a payout for several years worth of Social Security Disability – read http://snurl.com/ssdi-tax
Or if it was a lump-sum payout from a pension plan – Form 4972 http://www.irs.gov/pub/irs-pdf/f4972.pdf

Oh well, sorry I couldn’t be more help. But thanks for the trip down Memory Lane!

And remember, you can find answers to all kinds of questions about income averaging and other tax issues, free. Where? Where else? At TaxMama.com

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

File Download (0:00 min / 1 MB)

Leave a Reply