Publication 225: Farmer's Tax Guide; Chapter 15

This is archived information that pertains only to the 2004 Tax Year. If you
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Table of Contents

Preparing the Return

This sample return uses actual forms to show you how to prepare your income tax return. However, the information shown on the filled-in forms is not from any actual farming operation.

Walter Brown is a dairy farmer and his wife, Jane, is a substitute teacher for the county school system. They have three children. Their return has been prepared using the cash method of accounting. See chapter 2 for an explanation of the cash method and other methods of accounting.

Rounding off to whole dollars. You may round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Losses from operating a farm. The sample return shows a profit from the operation of the farm. However, if your deductible farm expenses are more than your farm income for the year, you have a loss from the operation of your farm. If your loss is more than your other income for the year, you may have a net operating loss (NOL). You may also have an NOL if you had a personal or business-related casualty or theft loss that was more than your income.

If you have an NOL this year, you may be able to reduce your income (and tax) in other years by carrying the NOL to those years and deducting it from income.

To determine if you have an NOL, complete your tax return for the year. You may have an NOL if a negative figure appears on Form 1040, line 40. If this is the case, see Losses From Operating a Farm in chapter 4.

Preparing the Return

Schedule F (Form 1040)

The first step in preparing Mr. Brown's income tax return is to determine his net farm profit or loss on Schedule F. The income and expenses shown on this Schedule F are taken from his farm receipt and expense records. Data for the depreciation and section 179 deductions are taken from Form 4562 and the illustrated Depreciation Worksheet that follows Form 4562. Mr. Brown has filed all required Form 1099 information returns.

On line B, he writes the number “112120” from the list of Principal Agricultural Activity Codes on page 2 of Schedule F (not shown). This indicates that his principal source of farm income is from dairy farming.

Schedule F- Part I (Income)

Mr. Brown keeps records of the various types of farm income he receives during the year. (Farm income is discussed in chapter 3.) He uses this information to complete Part I of Schedule F.

Line items. He fills in all applicable items of farm income.

Line 1. In 2004, he sold steers he had bought for resale. He enters sales of $27,192.

Line 2. He enters the cost of the steers, $6,523. He has kept a record of the cost of the livestock he bought and is careful to deduct the cost of an animal in the year of its sale.

Line 3. He subtracts his cost on line 2 from the sales on line 1 and reports the difference, $20,669, as his profit on line 3. Had he sold any other items he bought for resale, he would combine the sales and costs of these items with the sales and costs of the steers and report only the totals on lines 1, 2, and 3. He does not report here sales of livestock held for draft, breeding, sport, or dairy purposes. He reports those sales on Form 4797.

Line 4. He enters the income he received during 2004 from sales of items he raised or produced on his farm. His principal source of farm income is dairy farming. The amount reported on this line, $263,018, includes sales of all of the following.

Milk	$233,874
Steers and calves he raised ^*	2,914
Vegetables he grew	1,457
Corn ($7,286), hay ($8,944), and wheat ($8,543) he raised	24,773
Total reported on line 4	$263,018

^* Raised other than for draft, breeding, sport, or dairy purposes.

Lines 5a and 5b. He reports the $33 he received from cooperatives on line 5a. Since this is the dollar amount of a qualified written notice of allocation paid as part of a patronage dividend, he enters $33 as the taxable amount on line 5b.

Lines 6a and 6b. He received Farm Service Agency (FSA) cost-sharing payments of $438 on a soil conservation project (diversion channels) completed in 2004. He received the income as materials and services paid for by the government and reports it on both line 6a and line 6b. The Department of Agriculture (USDA) generally reports such payments to the recipient on Form 1099-G. The entire $438 has been included on Schedule F, line 14, as a conservation expense. He did not receive any cost-sharing payments this year that he could exclude from his farm income.

Line 7a. He reports the $665 loan he received from the Commodity Credit Corporation (CCC) because he elected in a previous year to treat these loans as income in the year received. If he had elected not to report his CCC loan as income in the year received and forfeited the loan in a later year, he would report the loan as income on lines 7b and 7c in the year of forfeiture.

Line 9. He reports his $1,258 of income from custom harvesting.

Line 10. On his 2003 income tax return, he claimed a credit of $142 for excise taxes on gasoline used on his farm. He includes the entire $142 in his 2004 income on line 10 because he deducted the total cost of gasoline (including the $142 of excise taxes) as a farm business expense in 2003. He also includes $250 he received as a director of the local milk marketing cooperative and $175 received for firewood he cut and sold in 2004.

Schedule F- Part II (Expenses)

Mr. Brown records his farm expenses during the year for tax purposes and summarizes these expenses at the end of the year. (Farm business expenses are discussed in chapter 4.) This gives him his deductible expenses, which he enters in Part II of Schedule F.

Line items. He fills in all applicable items of farm expense deductions.

Line 12. He uses his trucks 100% for his farming business and the actual cost (not including depreciation) of operating the trucks in 2004 was $2,659. He uses his family car 60% for business (determined by records at year end). It cost $2,307 to operate the car in 2004. He can deduct $1,384 for the car ($2,307 × .60). He enters a total of $4,043 ($2,659 + $1,384) on line 12. (Depreciation is reported on line 16.)

Line 13. The $2,701 on this line is the amount he paid for pesticides and herbicides purchased during the year.

Line 14. He deducts the $1,040 spent on diversion channels in 2004. The amount listed here includes the full cost of the government cost-sharing project, which he has reported as income on line 6b. He continues the policy elected in previous years of deducting annual soil and water conservation expenses. The expenses are consistent with a conservation plan approved by the Natural Resources Conservation Service of the USDA. The amount was not more than 25% of Mr. Brown's gross income from farming, so the entire amount is deductible. See chapter 5 for more information on soil and water conservation expenses.

Line 15. The $1,575 on this line is the amount he paid a company for spraying his crops. He made the payment to a corporation, so he does not file a Form 1099-MISC to report the payment.

Line 16. He enters the $141,061 depreciation from Form 4562, discussed later.

Line 18. He enters the $18,019 cost of feed bought for consumption by his livestock in 2004. He did not include the cost of feed bought for livestock he and his family intend to consume. He also did not include the value of feed grown on his farm.

Line 19. He enters $6,544. This is the amount paid for fertilizer and lime.

Line 20. He deducts the $5,105 he paid for trucking and milk marketing expenses. He chose to itemize the $807 government milk assessment and lists it separately on line 34a.

Line 21. He deducts the $3,521 cost of gasoline, fuel, and oil bought for farm use, other than amounts he included on line 12 for car and truck expenses. He did not deduct the cost of fuel used for heating, lighting, or cooking in his home.

Line 22. He deducts the $1,070 cost of insurance on his farm buildings (but not on his home), equipment, livestock, and crops. He did not deduct the entire premiums on 3-year and 5-year insurance policies in the year of payment, but deducts each year only the part that applies to that year. For more information, see Insurance in chapter 4.

Lines 23a and 23b. He deducts on line 23a the $3,175 interest paid on the farm mortgage for the land and buildings used in farming. He deducts on line 23b the $1,043 interest paid on obligations incurred to buy livestock and other personal property used in farming or held for sale. He deducts his home mortgage interest on Schedule A (Form 1040), which is not shown.

Line 24. He enters the $16,416 in wages he paid during the year for labor hired to operate his farm, including wages paid to his wife and children. He did not include amounts paid to himself. He has no employment credits that would reduce the amount of wages entered. For those wages paid that were subject to social security and Medicare taxes, he included the full amount of the wages before reduction for the employee's share of those taxes, or other amounts withheld. His share of the social security and Medicare taxes is included in the total taxes deducted on line 31. See chapter 13 for information on employment taxes.

Line 26b. He enters only the $2,400 cash rent paid for the use of land he rented from a neighbor, Mr. Green. He did not deduct rent paid in crop shares. He completed a Form 1099-MISC for the rent paid to Mr. Green and sent Copy A to the IRS with Form 1096. He gave Mr. Green copy B of the Form 1099-MISC.

Line 27. The $5,424 he enters includes $4,902 for repairs to farm machinery and $522 for repairs to farm buildings. He did not include the value of his own labor or the cost of repairs on his home. He prepared Form 1099-MISC for the farm machinery repairs because the repair shop is a limited liability company (LLC) that is not classified as a corporation. He sent Copy A to the IRS with Form 1096 and gave copy B to the owner of the repair shop. If the repair shop had been a corporation, Mr. Brown would not have had to file a Form 1099-MISC. He does not have to file a Form 1099-MISC for the building repair because he paid less than $600.

Line 28. He enters the $2,132 cost of seeds and plants used in farming. He deducts these costs each year. He did not include the cost of plants and seeds purchased for the family garden.

Line 30. He enters the $2,807 paid for livestock supplies and other supplies, including bedding.

Line 31. He enters $3,201 for taxes paid during 2004, including state and local taxes on the real estate and personal property used in farming. He did not include the sales tax paid on farm supplies because this tax was included in the cost for supplies he deducted on line 30. He also did not include the gasoline tax on the gasoline bought for farm use, including the gasoline used in his trucks and family car for farm business, because these taxes were included in the costs for gasoline he deducted on lines 21 and 12. He included his share of social security and Medicare taxes paid for agricultural employees. He filed Form 943 (not shown) in January 2005, reporting these taxes for calendar year 2004.

He does not deduct, on Schedule F, his state income tax or the taxes on his home and the part of his land not used for farming. He deducts these taxes on Schedule A (Form 1040), which is not shown. He does not deduct any federal income tax paid during the year.

Line 32. He enters $3,997 for the cost of water, electricity, gas, and telephone service used only in farming. He cannot deduct personal utilities. He also cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line to his home.

Line 33. He enters $3,251, the total paid during 2004 for veterinary fees ($1,855), livestock medicines ($650), and breeding fees ($746). He does not prepare Form 1099-MISC for the veterinarian and the supplier of breeding services because both are incorporated.

Line 34. He enters other farm business expenses. These include: an $807 government milk assessment; $347 for commissions, dues, and fees; $287 for financial records and office supplies; and $534 for farm business travel and meals. Farm business travel includes expenses for the State Forage Tour and for attending the farm management conference at State University. He included only 50% of the cost of meals in the deduction.

Line 36-Net farm profit. To arrive at his net farm profit, he subtracts the amount on line 35 ($230,500) from the amount on line 11 ($286,648). His net farm profit, entered on line 36, is $56,148. He also enters that amount on Form 1040, line 18, and on Schedule SE (Form 1040), Section A, line 1. Because he shows a net profit on line 36, he skips line 37.

Form 4562 - Depreciation and Amortization

Mr. Brown follows the instructions and lists the information called for in Parts I through IV. He also completes Part V on page 2 to provide information on listed property used in his farming business. The three vehicles used in his business are listed property. The truck, sold in July and shown on Form 4797, was placed in service in 1994 and fully depreciated in 1999. No depreciation is allowed for 2004.

Depreciation record. He records information on his depreciable property in a book that he can use to figure his depreciation allowance for several years. He uses the Depreciation Worksheet from the Form 4562 instructions to figure his 2004 deduction.

Basis for depreciation. He bought his farm on January 8, 1978. Timber on the farm was immature and had no fair market value (FMV). He immediately allocated the total purchase price of the farm among the land, house, barn, and fences (no other capital improvements were included in the price of the farm). He made the allocation on the purchase date in proportion to (but not in excess of) the FMVs of the assets and in the required asset order. See Trade or Business Acquired in Publication 551 for more information.

He entered in his depreciation record the part of the purchase price for the depreciable barn and fences, giving him the basis for figuring his depreciation allowance. The fences were fully depreciated in 1987. Because he cannot depreciate the house (no office claimed) and land, he keeps a separate record showing their bases.

Methods of depreciation. He depreciates all his property placed in service before 1981 using the straight line method. He chose the alternate Accelerated Cost Recovery System (ACRS) method for his machine shed placed in service in 1986. He chose the following systems for all of his assets placed in service in the year indicated using the Modified Accelerated Cost Recovery System (MACRS) and the half-year convention.

2000 - straight line Alternative Depreciation System (ADS).
2001, 2002, and 2004 -150% declining balance General Depreciation System (GDS).

Depreciable property. One of his purchased dairy cows (#42) was killed by lightning in July 2004. Two other purchased cows (#52 and #60) were sold in 2004. The cows were depreciated under MACRS (ADS), using a half-year convention. Therefore, he can claim a half-year's depreciation for each cow in 2004.

He has other breeding and dairy cows he raised. He did not claim depreciation on them since his basis in the cows is zero for income tax purposes.

During 2004 the Browns owned two family cars. One of them was not used for farm business so Mr. Brown cannot deduct depreciation on it. Based on his written records, he determined at the end of the year that his other car was used 60% for his farm business and 40% for personal driving.

The Depreciation Worksheet contains an itemized list of Mr. Brown's assets for which he is deducting depreciation in 2004. He must list each item separately to keep track of its basis. The pickup truck and car purchased in 2001 are listed property in the 5-year property class.

New assets. Mr. Brown added three assets to his farming business in 2004.

In January, he completed and placed in service a dairy facility designed specifically for the production of milk and to house, feed, and care for dairy cattle (single purpose livestock structure). The construction of the dairy facility began in 2003. The building is depreciated separately from the milking equipment it houses. The cost of the building is $56,500 and it is 10-year property under MACRS. The cost of the equipment is $72,000 and it is 7-year property under MACRS.
In February, he made improvements to his machine shed for a total cost of $1,300. The improvements are depreciated as if they were a separate building with a 20-year recovery period.
In July, he acquired a new tractor (tractor #5) by trading tractor #2 and paying $33,729 cash. The adjusted basis of tractor #2 was $1,378 when it was traded. The new tractor has a basis of $35,107 ($33, 729 + $1,378). Mr. Brown makes a new entry on his Depreciation Worksheet for the exchanged basis (the $1,378 carryover basis of tractor #2). He chooses to take the 50% special depreciation allowance on the exchanged basis. After reducing this basis by the allowance ($689), the remaining basis ($689) is depreciated over the remaining life of tractor #2, using the same depreciation method and recovery period. The depreciation for the last six months of the year is $34.45 for the exchanged basis. Mr. Brown made a new entry on his Depreciation Worksheet to depreciate the $33,729 of new excess basis in tractor #5 over the new 7-year life of tractor #5. He completed Form 8824, Like-Kind Exchanges, (not shown) to report the trade and will include this form when he files his return. He elected to expense part of the cost of the tractor in 2004 and depreciated the rest of the new excess basis.

Temporary regulations were issued to provide more flexibility for computing depreciation deductions when property is acquired in a like-kind exchange. These regulations are reflected in the transactions above. For details, see chapter 7 and the Instructions for Form 4562.

Line items. Form 4562 is completed by referring to the Depreciation Worksheet.

Line 2. Mr. Brown enters $162,229 on line 2. This is the total cost of all section 179 property placed in service in 2004. In figuring his cost, he does not include the portion of the new basis in the acquired tractor that was carried over from the traded tractor ($1,378). The dairy facility and equipment qualify as section 179 property. However, the machine shed improvement does not qualify. It is not a single purpose agricultural (livestock) structure.

Line 6. He enters the description of the property (tractor and dairy equipment) he is electing to expense under section 179. His cost basis for the section 179 deduction is limited to the cash he paid for the tractor and the dairy equipment. He enters his cost basis of $33,729 for the tractor and $72,000 for the dairy equipment, in column (b). He then enters the tentative deduction, $30,000 for the tractor and $72,000 for the dairy equipment, in column (c). However, this amount is subject to the business income limit on line 11. (The total cost of his section 179 property ($162,229) did not exceed the investment limit, $410,000, and he is therefore subject to the maximum dollar limit, $102,000.)

Lines 11 and 12. His taxable income from his farming business (without including the section 179 deduction and the self-employment tax deduction) exceeds the maximum dollar limit on line 5. He enters $102,000 on lines 11 and 12. See chapter 7 for information on the section 179 deduction.

Line 14. He enters $31,454 for the special depreciation allowance for the properties that qualify.

The allowance is an additional 50% of the qualified property's cost or basis (after subtracting the section 179 deduction). However, instead of claiming the 50% allowance, taxpayers can elect to claim the 30% allowance or elect not to claim any special allowance.

Line 16. He enters $312 for his other depreciation. The $312 is for the asset depreciated under ACRS (alternate method).

Line 17. He enters $2,708. This is his MACRS depreciation for assets placed in service from 2000 through 2002 and the exchanged basis of the tractor received in the like-kind exchange.

Line 19. All property placed in service in 2004 in each class is combined and entered in Part III. The abbreviation HY used in column (e) stands for the half-year convention. The 150 DB in column (f) stands for the 150% declining balance method under MACRS.

Line 21. He enters his depreciation deduction for listed property, $2,244, on line 21. This is the total shown on line 28 of the form. He has two depreciable assets that are listed property—the car used 60% for business and the pickup truck purchased in 2001. His deduction for the car cannot be more than 60% of the limit for passenger automobiles for the year he placed the car in service. The other truck, which he sold this year, was fully depreciated.

Line 22. He enters the total depreciation on line 22 and carries the total, $141,061 to Schedule F, line 16.

Other items. He completes Sections A and B of Part V to provide the information required for listed property. He does not complete Section C because he does not provide vehicles for his employees' use.

He follows the practice of writing down the odometer readings on his vehicles at the end of each year and when he places the vehicles in service and disposes of them. In addition, because he uses his car only partly for business, he writes down the number of business miles it is driven any day that it is used for business. He uses these records to answer the questions on lines 24a and 24b of Section A and lines 30 through 36 of Section B.

He has no amortization, so he does not use Part VI of Form 4562.

Schedule SE (Form 1040) Self-Employment Tax

After figuring his net farm profit on page 1 of Schedule F, Mr. Brown figures his self-employment tax. To do this, he figures his net earnings from farm self-employment on Short Schedule SE (Section A). He is not required to use Long Schedule SE (Section B). First he prints his name (as shown on his Form 1040) and his social security number at the top of Schedule SE. Only his name and social security number go on Schedule SE. His wife does not have self-employment income. If she had self-employment income, she would file her own Schedule SE.

Line items. He figures his self-employment tax on the following lines.

Line 1. He enters his net farm profit, $56,148. All the income, losses, and deductions listed on Schedule F are included in determining net earnings from farm self-employment (see the types of self-employment income listed in chapter 12). Consequently, he did not have to adjust his net profit to determine his self-employment net earnings from farming.

Line 3. If he were engaged in one or more other businesses in addition to farming, he would combine his net profits from all his trades or businesses on line 3 of this schedule. However, because farming was his only business, he enters his net profit from farming (the amount shown on line 1).

Line 4. He multiplies line 3 by .9235 to get his net earnings from self-employment and enters $51,853 on line 4.

Lines 5 and 6. He multiplies line 4 by 15.3% and enters $7,934 on line 5. This is his self-employment tax for 2004. He also enters $7,934 on line 57 of Form 1040. He enters $3,967 on line 6 and also on Form 1040, line 30 (deduction for one-half of his self-employment tax).

Form 4684-Casualties and Thefts

Mr. Brown's only business casualty occurred on July 7 when a dairy cow he purchased 4 years ago was killed by lightning. He shows the loss from the casualty on page 2 of Form 4684. Only page 2 is shown, because page 1 is for nonbusiness casualties.

He prints his name, his wife's name, and his identifying number at the top of page 2.

Part I. He prints the kind of property, “Dairy cow #42,” its location, and the date acquired on line 19. He enters his adjusted basis in the cow, $257, on line 20 and the $109 insurance payment he received for the cow on line 21. Line 20 is more than line 21, so he skips line 22. On lines 23 and 24, he enters the FMVs before and after the casualty ($500 and $0, respectively), and he shows the difference, $500, on line 25. He enters the amount from line 20 on line 26, subtracts line 21 from line 26, and enters $148 on lines 27 and 28.

Part II. He owned the cow for more than one year, so he identifies the casualty on line 34 and enters $148 on lines 34(b)(i), 35(b)(i), 37, and 38a, and on Form 4797, Part II, line 14.

Form 4797- Sales of Business Property

After completing Schedule F (Form 1040) and Section B of Form 4684, Mr. Brown fills in Form 4797 to report the sales of business property. See Table 9-1 in chapter 9 for the types of property reported on Form 4797.

He prints his name, his wife's name, and his identifying number at the top of Form 4797.

Before he can complete Parts I and II, he must complete Part III to report the sale of certain depreciable property.

Part III. Mr. Brown sold three depreciable assets in 2004 at a gain. They consisted of a truck, a mower, and a purchased dairy cow, #60. He has information about their cost and depreciation in his records. Only the dairy cow appears on the Depreciation Worksheet. The truck and mower were fully depreciated.

He sold the truck on July 9, the mower on August 12, and the cow on October 28. Since the gains on these items were gains from dispositions of depreciable personal property, as explained in chapter 9, he must determine the part of the gain for each item that was ordinary income.

He enters the description of each item on lines 19A through 19C and relates the corresponding property columns to the properties on those lines. He completes lines 20 through 25(b) for each disposition.

Gain from dispositions. The gain on each item is shown on line 24. His gain on the sale of the truck is $700 (Property A). His gain on the sale of the mower is $70 (Property B). His gain on the sale of the cow is $82 (Property C). The gain on each item is entered in the appropriate property column on line 25(b).

Summary of Part III gains. On line 30, he enters $852, the total of property columns A through C, line 24. On line 31, he enters $852, the total of property columns A through C, line 25(b). This amount is the gain that is ordinary income. He also enters this amount on Part II, line 13.

He subtracts line 31 from line 30 and enters -0- on line 32. He has no long-term capital gain on the dispositions. All his gain is ordinary income.

Part I. All the animals in Part I met the required holding period.

Mr. Brown sold at a gain several cows he had raised and used for dairy purposes. His selling expense was $325 for these cows, which he shows on line 2(f). He enters the gain from the sale on line 2(g). He also enters on line 2(g) the loss from the sale of purchased dairy cow #52. Because he sold purchased dairy cow #52 at a loss, he entered it in Part I instead of Part III. See Table 9-1 in chapter 9 for where to report items on Form 4797.

He combines the gains and loss on line 2(g) and enters $12,740 on line 7(g). He has no nonrecaptured net section 1231 losses from prior years, so he does not fill in lines 8, 9, and 12. If he had nonrecaptured section 1231 losses, part or all of the gain on line 7 would be ordinary income and entered on line 12. Based on the instructions for line 7, he enters $12,740 as a long-term capital gain on Schedule D, line 11(f).

Part II. Mr. Brown enters on line 10 the $250 gain from the sale of a raised dairy heifer held less than 24 months for breeding purposes. He had previously entered the $852 gain from Part III, line 31, on line 13 and the $148 loss from Form 4684 on line 14. He totals lines 10 through 16 and enters $954 on line 17. He carries the gain from line 17 to line 18b and shows it as ordinary income on Form 1040, line 14.

Schedule D (Form 1040) Capital Gains and Losses

After completing Form 4797, Mr. Brown fills in Schedule D to report gains and losses on capital assets. He prints his name, his wife's name, and his social security number at the top of Schedule D.

Entries. He enters the required information in the appropriate columns.

Lines 1 and 3. He reports as a short-term loss on line 1 his $50 loss on the 2004 sale of H. T. Corporation stock held one year or less. He includes the gross sales price of the stock in column (d) on lines 1 and 3.

Line 7. He completes Part I of Schedule D by entering on line 7 the loss in column (f) on line 1.

Lines 8 and 10. He enters in column (f) on line 8 his $745 long-term gain on the sale of Circle Corporation stock held more than one year. He includes the gross sales price in column (d) on lines 8 and 10.

Line 11. Mr. Brown had previously entered on line 11 the gain from line 7(g) of Form 4797.

Line 15. He combines the column (f) amounts on lines 8 and 11 and enters the result on line 15.

Line 16. In Part III, he combines lines 7 and 15 and enters his total capital gain on line 16. He also enters this amount on Form 1040, line 13.

After he completes his Form 1040 through line 42, he will use the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040 instructions) and the Schedule J (Form 1040), Income Averaging for Farmers and Fishermen, to determine which one yields the lowest tax.

Form 1040, Page 1

Mr. Brown is filing a joint return with his wife. He uses the form he received from the IRS.

Line items. He fills in all applicable items on page 1 of Form 1040.

Line 6c. He prints the name and social security number of each dependent child he claims. He also checks the box in column (4) for his youngest son who is a qualifying child for the child tax credit.

Line 7. Mrs. Brown worked part time as a substitute teacher for the county school system during 2004. She also worked for Mr. Brown on the farm during 2004. He enters on line 7 her total wages, $8,950 ($7,750 from the school system and $1,200 from the farm), as shown on the Forms W-2 that he and the school system gave her.

Lines 8a and 9a. He did not actually receive cash payment for the interest he listed on line 8a ($375). It was credited to his account so that he could have withdrawn it in 2004. Therefore, he constructively received it and correctly included it in his income for 2004. He enters the $220 in ordinary dividends he received from the Circle Real Estate Investment Trust on line 9a. They are not qualified dividends so he made no entry on line 9(b).

He received patronage dividends from farmers' cooperatives based on business done with these cooperatives. He does not list these dividends here, but properly included them on Schedule F, Part I, lines 5a and 5b.

He did not receive more than $1,500 in interest or $1,500 in dividends and none of the other conditions listed at the beginning of the Schedule B instructions applied, so he is not required to complete Schedule B.

Lines 13, 14, and 18. He previously entered the following items.

His capital gain on line 13 from Schedule D, line 16.
His other gain on line 14 from Form 4797, line 18b.
His net farm profit on line 18 from Schedule F, line 36.

Line 22. He adds the amounts on lines 7 through 21 and enters the total, $80,082.

Line 30. He has already entered one-half of his self-employment tax, $3,967, which he figured on Schedule SE.

Line 31. He paid premiums of $7,200 during 2004 for health insurance coverage for himself and his family and qualifies for the self-employed health insurance deduction. He figures the part of his insurance payment that he can deduct by completing the Self-Employed Health Insurance Deduction Worksheet (not shown) in the instructions for Form 1040. He enters the result, $7,200, on line 31.

Line 35. He adds the amounts on lines 23 through 34a and enters the total, $11,167, on line 35.

Lines 36 and 37. He subtracts line 35 from line 22 to get his adjusted gross income and enters the result, $68,915, on line 36 and also on line 37 of page 2.

Form 1040, Page 2

Mr. Brown fills in the following lines on page 2 of Form 1040.

Line 39. He enters $15,000 from his Schedule A (Form 1040), which is not shown, because the total of his itemized deductions is larger than the $9,700 standard deduction for his filing status (married filing jointly).

Lines 40, 41, and 42. He subtracts the $15,000 on line 39 from the $68,915 on line 37 and enters the result, $53,915 on line 40. He enters $15,500 (5 × $3,100) on line 41 and subtracts this amount from the amount on line 40 to get a taxable income of $38,415 on line 42.

Line 43. He enters $3,568 from Schedule J, line 22. For information on how he figured his tax using income averaging, see Schedule J (Form 1040), later.

Line 45. Mr. Brown determined that they do not owe alternative minimum tax (line 44). Therefore, he enters on line 45 the same tax shown on line 43.

Line 51. The Browns qualify for the child tax credit. He figures his credit by completing the Child Tax Credit Worksheet (not shown) in the instructions for Form 1040. He enters his credit, $1,000, on line 51.

Lines 55 and 56. He adds the amounts on lines 46 through 54 and enters the total, $1,000, on line 55. He subtracts that amount from the tax on line 45 and enters $2,568 on line 56.

Line 57. He has already entered the $7,934 self-employment tax he figured on Schedule SE.

Line 62. He adds the amounts on lines 56 through 61and enters $10,502, which is the total tax for 2004.

Line 63. He enters the income tax withheld from Mrs. Brown's wages, $1,435, as shown on the Forms W-2 she received. He attaches a copy of her Forms W-2 to the front of Form 1040.

Line 64. He did not make 2004 estimated tax payments since two-thirds of his gross income for 2003 was from farming. He was sure that at least two-thirds of his gross income for 2004 would again be from farming. Farmers who meet either of these conditions do not have to make 2004 estimated tax payments. If he files his Form 1040 and pays the tax due no later than March 1, 2005, he will not be penalized for failure to pay estimated taxes. He makes no entry on line 64.

Line 65. The Browns are not entitled to claim the earned income credit on line 65, because their adjusted gross income is more than $35,458.

Line 67. The Browns are not entitled to claim the additional child tax credit because they received the maximum amount of child tax credit they were entitled to on line 51.

Line 69. Mr. Brown enters his credit for $350 of federal excise tax on gasoline used in 2004. He checks box “b” and attaches Form 4136 (not shown) to his return, showing how he figured the credit. He must report the credit as other income on his Schedule F for 2005, because his deduction for the total cost of gasoline (including the $350 of excise taxes) as a farm business expense on Schedule F reduced his 2004 taxes.

Lines 70 and 74. He adds the amounts on lines 63 through 69 and enters the total, $1,785, on line 70. He subtracts that figure from the amount on line 62. The balance, $8,717, is entered on line 74.

Schedule J (Form 1040) Income Averaging for Farmers and Fishermen

In 2004, Mr. Brown's taxable income, $38,415, is substantially higher than in each of the 3 previous years. His taxable income amounts were only $2,500, $1,050, and $700 for 2003, 2002, and 2001, respectively. He elects to use income averaging by completing Schedule J to figure his tax.

He prints his name, his wife's name, and his identifying number at the top of Schedule J.

First, he uses the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure his tax without regard to income averaging. Next, he uses Schedule J to figure his tax using income averaging.

Line items. He fills in the lines on Schedule J.

Line 1. He enters $38,415, his taxable income from line 42 of Form 1040.

Line 2. He enters the part of his farm income he is electing to average, $24,117. He elects to treat this elected farm income as all coming out of his $56,148 of ordinary farm income from Schedule F. He could have elected to treat up to $12,740 of it as coming out of his gain from the sale of farm assets (other than land) that are reported in Part I of Form 4797. Reducing his ordinary income by this amount allows him to take advantage of the lowest tax brackets for this year and the 3 previous years.

Line 3. He subtracts the amount on line 2 from the amount on line 1 and enters $14,298 on line 3.

Line 4. Because he has capital gains and losses this year, he computes the tax on $14,298 using the Qualified Dividends and Capital Gain Tax Worksheet and enters the result, $758, on line 4. In this example, he decided to treat the elected farm income as all coming from his ordinary income. However, he could have made a different election to use some or all of the capital gains for 2004. In that case, the calculation for this line would have been made by reducing his capital gains for 2004 by the amount included in elected farm income and, unless all of the capital gains for 2004 were included in elected farm income, using the Qualified Dividends and Capital Gain Tax Worksheet to compute the tax on line 4.

Lines 5, 9, and 13. He enters his taxable income from 2001, 2002, and 2003 on lines 5, 9, and 13, respectively.

Lines 6, 10, and 14. He divides the amount on line 2 by 3.0 and enters the result, $8,039, on lines 6, 10, and 14.

Lines 7, 11, and 15. He figures his adjusted taxable income for the 3 previous years by adding the amounts on lines 6, 10, and 14 to the amounts on lines 5, 9, and 13, respectively.

Lines 8, 12, and 16. He figures the tax on the amounts on lines 7, 11, and 15 using the appropriate Tax Rate Schedules for the appropriate year and enters the results on lines 8, 12, and 16, respectively. In this example, he decided to treat the elected farm income as all coming from his ordinary income for 2004 and he added one-third of the elected farm income to the ordinary income of each of the previous 3 years. His income is taxed at no more than a 15% rate for each year. However, if he had made a different election to use some or all of the capital gains for 2004, one-third of that amount would be treated as capital gains for each of the previous 3 years and the tax on lines 8, 12, and 16 would be calculated using the appropriate Schedule D. The gains would be taxed at the appropriate capital gains rate for the previous years.

Line 17. He adds the amounts on lines 4, 8, 12, and 16 and enters the total, $4,032, on line 17.

Lines 18, 19, and 20. He enters his tax from his 2001, 2002, and 2003 returns on lines 18, 19, and 20, respectively.

Line 21. He adds the amounts on lines 18, 19, and 20 and enters the total, $464, on line 21.

Line 22. He subtracts the amount on line 21 from the amount on line 17 and enters $3,568 on line 22. The tax on this line is less than the $3,703 of tax he figured using the Qualified Dividends and Capital Gain Tax Worksheet. Therefore, he enters on line 43 of his Form 1040 the amount from this line.

Completing the Return

The Browns sign their names and enter the date signed, their occupations, and their telephone number at the bottom of page 2 of Form 1040. (If they had paid a preparer to do their tax return, the preparer would also sign the return and provide the information requested at the bottom of the page.) Mr. Brown prints in his name, his wife's name, and their address in the label section. He writes his and his wife's social security numbers in the boxes next to the label section.

He writes a check payable to the United States Treasury for the full amount on line 74 of Form 1040. On the check, he writes his social security number, their telephone number, and “2004 Form 1040.” His name and address are printed on the check. Mr. Brown could have chosen instead to pay his taxes by credit card (American Express® Card, Discover® Card, MasterCard® card, or Visa® card). For information about how to pay by credit card, see the Form 1040 Instructions.

After making a copy of their complete return for his records, he assembles the various forms and schedules behind Form 1040 in the following order, based on the Attachment Sequence Number shown in the upper right corner of each schedule or form and included after each item listed below.

Schedule A. (07) (not shown)
Schedule D. (12)
Schedule F. (14)
Schedule SE. (17)
Schedule J. (20)
Form 4136. (23) (not shown)
Form 4684. (26)
Form 4797. (27)
Form 4562. (67)
Form 8824. (109) (not shown)

He completes Form 1040-V, Payment Voucher, which was included in his tax package. He carefully follows the instructions for mailing his return and paying the tax.

Form 1040 - page 1

Form 1040 - page 2

Please click the link to view the image.

Schedule F (Form 1040) - page 1

Schedule SE (Form 1040) - page 1

Schedule J (Form 1040) - page 1

Depreciation Worksheet

Chapter 15 - Sample Return