Friday, September 29, 2006

Income Averaging for Fishers--Calming the Seas of Progressive Tax Rates

The Treasury Inspector General for Tax Administration recently released a 2004 survey indicating that over 4600 fishermen failed to use income averaging provisions from the American Jobs Creation Act of 2004 and thus overpaid taxes. Almost $2 and 1/2 million was overpaid and, disturbingly, a large majority had their returns done by paid preparers. A preceding report had bad news, though less bad, from farmers, where about half failed to use the three-year averaging provision. Averaging basically takes the average of three years of operations, thus in an industries like fishing or farming, where some years may be far more lucrative than others, keeping the fisher and farmer out of top tax rates in good years when they have little income in the other two years.

The most disturbing part of the story is the failure of paid preparers to take advantage of the provision. Maritime state tax CPE appears to need greater coverage of these provisions.

2 Comments:

Blogger neilmcintyre.ca said...

That sounds interesting Dan. I don't know anything about US tax, and I was wondering, if they use the 3 year average to decrease taxes in good years, do they have to keep using the average in other years when their actual income is lower than the average? Or can you pick and choose each year whatever method results in the lowest tax?

10:48 PM  
Blogger Dan Meyer said...

Good question, Neil. The appropriate form is Schedule J for Form 1040, available online at www.irs.gov. The decision to average is on a year-by-year basis, though obviously it would be rare for a taxpayer to average in back-to-back years. I have never filed the present averaging form for any taxpayers (I did file Schedule G, available for taxpayers in general prior to 1987). As best as I understand, the intent of the form is not to reduce the amount of income subject to tax, but instead to tax some of the farmer/fisher's income at the lower tax rates (offsetting the progressivity of the rates) faced in years with lower income.

4:30 PM  

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