For most taxpayers, the option to use income averaging to compensate for unusual or unexpected income during a particular year expired with the 1986 Tax Reform Act. Income averaging permitted taxpayers to avoid being put in a high tax bracket during the year the large amount of income was received. However, farmers and fishermen are an exception to the rule. Section 1301 of the Internal Revenue Code, as amended several times over the years, permits these two categories of taxpayers to elect to average farming and fishing income over three years. Timber owners (tree farmers) are excluded from the definition of “farming.” However, non-industrial timber owners, who for the most part only realize timber sale income on a sporadic basis, are as deserving of the option to income average as are farmers and fishermen.
Background: Many non-industrial forest landowners make only a few substantial timber sales during their lifetime. And for those who do sell more often, there are still many highs and lows in total income from one year to the next. The occasions when sale income is received often place an unexpected and onerous tax burden on the timber sellers who may have only modest income and are either retired or semi-retired. Although most timber sale proceeds are reported as long-term capital gains, the opportunity to income average could well mean the difference between the 10 percent and the 20 percent capital gains rates (temporarily 5 percent and 15 percent). Also, without income averaging, many non-industrial timber sellers, because of the large “spike” of income from a timber sale, are precluded from taking full advantage of otherwise permitted itemized deductions and certain credits which are phased out as income rises. Timber sale proceeds, when added to other income without income averaging, can, in certain situations, also lead to triggering the onerous alternative minimum tax.
Non-industrial timber owners, who make intermittent timber sales, are as deserving of the option to income average as are farmers and fishermen. The tax savings would add the benefit of helping to fund reforestation operations.