I.R.C. §1301, Act §314 Effective for tax years beginning after 2003
Background
An individual taxpayer engaged in a farming business may elect to compute his or her current year regular tax liability by averaging, over the prior three year period, all or a portion of his or her taxable income from the trade or business of farming. Because farmer income averaging reduces the regular tax liability, the AMT may be increased. Thus, the benefits of farmer income averaging may be reduced or eliminated for farmers subject to the AMT.
New Law
The Jobs Act of 2004 provides that, in computing AMT, a farmer’s regular tax liability is determined without regard to farmer income averaging. Thus, a farmer receives the full benefit of income averaging because averaging reduces the regular tax while the AMT (if any) remains unchanged.
Example: Effect of Income Averaging on AMT
Clay and Lilly Fields had $120,000 of net income from farming in 2004 and no other income. They had $50,000 of AMT adjustments. Without income averaging, their 2004 regular tax liability would be $17,736. Their tentative minimum tax is $24,763, which results in a $7,027 ($24,763 – $17,736) AMT liability. If the Fields elect to use income averaging, they can reduce their regular tax liability by $5,195. Before the change to I.R.C. §1301 by the Jobs Act of 2004, their AMT would have gone up by the same amount so their total tax liability for 2004 would not have changed. After the Jobs Act of 2004 change, their AMT liability remains the same and the Field’s total tax for 2004 is reduced by the $5,195 reduction of regular taxes. Reference: Land Grant University Tax Education Foundation, Inc.