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 4.) 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 2001, he sold steers he had bought for resale. He enters sales of $26,584.

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, $20,061, 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 2001 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, $163,018, includes sales of all of the following.

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 2001. 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 line 14 of Schedule F 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 2000 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 2001 income on line 10 because he deducted the total cost of gasoline (including the $142 of excise taxes) as a farm business expense in 2000. 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 2001.

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 5.) 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 2001 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 2001. 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 2001. The amount listed here includes the full cost of the government cost-sharing project, which he has reported as income on line 6. 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. Because the amount was not more than 25% of Mr. Brown's gross income from farming, the entire amount is deductible. See chapter 6 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 $42,681 depreciation from Form 4562, discussed later.

Line 18. He enters the $18,019 cost of feed bought for consumption by his livestock in 2001. 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 5.

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 16 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 a copy 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 a copy 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 2001, 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 2002, reporting these taxes for calendar year 2001.

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 $3,217, the total paid during 2001 for veterinary fees ($1,821), 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 ($132,086) from the amount on line 11 ($186,040). His net farm profit, entered on line 36, is $53,954. He also enters that amount on line 18 of Form 1040, and on line 1 of Section A, Schedule SE (Form 1040). 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 1992 and fully depreciated in 1997. No depreciation is allowed for 2001.

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 2001 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 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 ACRS method for his machine shed placed in service in 1986. Using the Modified Accelerated Cost Recovery System (MACRS) and the half-year convention, he chose the following systems for all of his assets placed in service in the year indicated.

• 1997--straight line Alternative Depreciation System (ADS).
• 1998--150% declining balance ADS.
• 1999 & 2001--150% declining balance General Depreciation System (GDS).

Depreciable property. One of his purchased dairy cows (#42) was killed by lightning in July 2001. Two other purchased cows (#52 and #60) were sold in 2001. 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 2001.

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 2001 the Browns owned two family cars. One of them was not used for farm business. Mr. Brown cannot deduct depreciation on it. Using 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 2001. He must list each item separately to keep track of its basis. The pickup truck and car purchased in 1998 are listed property in the 5-year property class.

New assets. Mr. Brown added three assets to his farming business in 2001.

1. 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 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.
2. 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.
3. In July, he acquired tractor #5 by trading tractor #2 and paying $33,729 cash. The adjusted basis of tractor #2 was $1,378 when it was traded (Mr. Brown claimed half a year of depreciation). The new tractor has a basis of $35,107 ($33,729 + $1,378). The portion of the new basis carried over from tractor #2 ($1,378) is depreciated over the remaining life of tractor #2. Therefore, Mr. Brown left the depreciation of that portion of the basis on his Depreciation Worksheet as if he still owned tractor #2 but made a note that the remaining basis on that line is part of his basis in tractor #5. Mr. Brown made a new entry on his Depreciation Worksheet to depreciate the $33,729 of new 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 2001 and depreciate the rest of the new basis.

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 2001. 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) 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. He enters his cost basis of $33,729 in column (b). He then enters the tentative deduction, $24,000, in column (c). However, this amount is subject to the business income limit on line 11. (The total cost of his section 179 property did not exceed the investment limit, $200,000, and he is therefore subject to the maximum dollar limit, $24,000.)

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 $24,000 on lines 11 and 12. See chapter 8 for information on the section 179 deduction.

Line 15. All property placed in service in 2001 in each class is combined and entered in Part II, line 15. 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 17. He enters $2,823, his MACRS depreciation deduction for assets placed in service from 1997 through 1999, on line 17 of Part III. None of the assets included are listed property. Listed property is entered in Part V as explained later under Line 20.

Line 19. On line 19, he enters $574 for the asset placed in service before 1981 and the asset depreciated under ACRS.

Line 20. He enters his depreciation deduction for listed property, $2,244, on line 20. This is the total shown on line 26, Part V, page 2 of the form. He has two depreciable assets that are listed property--the car used 60% for business and the pickup truck purchased in 1998. 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 21. He enters the total depreciation on line 21 and carries the total, $42,681 to line 16 of Schedule F.

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 23a and 23b of Section A and lines 28 through 34 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, $53,954. 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 15). 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 $49,827 on line 4.

Lines 5 and 6. He multiplies line 4 by 15.3% and enters $7,624 on line 5. This is his self-employment tax for 2001. He also enters $7,624 on line 53 of Form 1040. He enters $3,812 on line 6 and also on line 27 of Form 1040 (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, since 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 shows 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. Since line 20 is more than line 21, 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. Since he owned the cow for more than one year, 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 and Section B of Form 4684, Mr. Brown fills in Form 4797 to report the sales of business property. See Table 11-1 in chapter 11 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 2001 at a gain. They consisted of a truck, a mower, and 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 11, 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 line 13, Part II.

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 shows on line 2(f), a selling expense of $20 for a raised dairy heifer and enters on line 2(g) the gain from the sale of the heifer and 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 11-1 in chapter 11 for where to report items on Form 4797.

He combines the gains and loss on line 2(g) and enters $14,770 on line 7. Since he has no nonrecaptured net section 1231 losses from prior years, 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. Following the instructions for line 7, he enters $14,770 as a long-term capital gain on line 11(f) of Schedule D.

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 line 31, Part III, on line 13 and the $148 loss from Form 4684 on line 14. He totals lines 10 through 17 and enters $954 on line 18. He carries the gain from line 18 to line 18b(2) and shows it as ordinary income on line 14 of Form 1040.

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 2001 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 of Form 4797.

Line 16. He combines the column (f) amounts on lines 8 and 11 and enters the result on line 16.

Line 17. In Part III, he combines lines 7 and 16 and enters his total capital gain on line 17. He also enters this amount on Form 1040, line 13.

After he completes his Form 1040 through line 39, he will use Part IV to figure his tax without regard to farm income averaging. See Schedule J (Form 1040) Farm Income Averaging, later.

He does not have a capital loss carryover this year, so he does not complete the Capital Loss Carryover Worksheet in the instructions.

Although Mr. Brown must complete Schedule D (Form 1040) and attach it to his return, certain other taxpayers may be able to complete the Capital Gain Tax Worksheet in the Form 1040 instructions instead. See the instructions for line 13 of the 2001 Form 1040.

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 boxes in column (4) since all of his children are qualifying children for the child tax credit.

Line 7. Mrs. Brown worked part time as a substitute teacher for the county school system during 2001. She also worked for Mr. Brown on the farm during 2001. 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 9. 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 2001. Therefore, he constructively received it and correctly included it in his income for 2001. He enters the $220 in dividends he received from the Circle Corporation on line 9.

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 lines 5a and 5b, Part I of Schedule F.

Since he did not receive more than $400 in interest or $400 in dividends and none of the other conditions listed at the beginning of the Schedule B instructions applied, 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 17.
• His other gain on line 14 from Form 4797, line 18b(2).
• 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, $79,918.

Line 27. He has already entered one-half of his self-employment tax, $3,812, which he figured on Schedule SE.

Line 28. He paid premiums of $8,400 during 2001 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, $5,040, on line 28 and includes the remaining part of his insurance payment in figuring his medical expense deduction on Schedule A (Form 1040), which is not shown.

Line 32. He adds the amounts on lines 23 through 31a and enters the total, $8,852, on line 32.

Lines 33 and 34. He subtracts line 32 from line 22 to get his "adjusted gross income" and enters the result, $71,066, on line 33 and also on line 34 of page 2.

Form 1040, Page 2

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

Line 36. He enters $7,800 from his Schedule A (Form 1040), which is not shown, because the total of his itemized deductions is larger than the $7,600 standard deduction for his filing status (married filing jointly).

Lines 37, 38, and 39. He subtracts the $7,800 on line 36 from the $71,066 on line 34 and enters the result, $63,266 on line 37. He enters $14,500 (5 × $2,900) on line 38 and subtracts this amount from the amount on line 37 to get a taxable income of $48,766 on line 39.

Line 40. He enters $6,537 from Schedule J, line 22. For information on how he figured his tax using farm income averaging, see Schedule J (Form 1040), later.

Line 42. Mr. Brown determined that they do not owe alternative minimum tax (line 41). Therefore, he enters on line 42 the tax shown on line 40.

Line 47. The Browns did not receive an advance payment of their 2001 taxes because their 2000 tax liability was $0. Mr. Brown figures the rate reduction credit by completing the Rate Reduction Credit Worksheet (not shown) in the instructions for Form 1040. He enters his credit, $600, on line 47.

Line 48. 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, $1,800, on line 48.

Lines 51 and 52. He adds the amounts on lines 43 through 50 and enters the total, $2,400, on line 51. He subtracts that amount from the tax on line 42 and enters $4,137 on line 52.

Line 53. He has already entered the $7,624 self-employment tax he figured on Schedule SE.

Line 58. He adds the amounts on lines 52 through 57 and enters $11,761, which is the total tax for 2001.

Line 59. He enters the income tax withheld from Mrs. Brown's wages, $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 60. He did not make 2001 estimated tax payments since two-thirds of his gross income for 2000 was from farming. He was sure that at least two-thirds of his gross income for 2001 would again be from farming. Farmers who meet either of these conditions do not have to make 2001 estimated tax payments. If he files his Form 1040 and pays the tax due no later than March 1, 2002, he will not be penalized for failure to pay estimated taxes. He makes no entry on line 60.

Line 61a. The Browns are not entitled to claim the earned income credit on line 61a, because their modified adjusted gross income is more than $32,121.

Line 63. The Browns are not entitled to claim the additional child tax credit because they received the maximum amount ($600) per qualifying child on line 48.

Line 65. Mr. Brown enters his credit for $350 of federal excise tax on gasoline used in 2001. 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 2002, since his deduction for the total cost of gasoline (including the $350 of excise taxes) as a farm business expense on Schedule F reduced his 2001 taxes.

Lines 66 and 70. He adds the amounts on lines 59 through 65 and enters the total, $785, on line 66. He subtracts that figure from the amount on line 58. The balance, $10,976, is entered on line 70.

Schedule J (Form 1040) Farm Income Averaging

In 2001, Mr. Brown's taxable income, $48,766, is substantially higher than in each of the 3 previous years. His taxable income amounts were only $2,500, $1,050, and $700 for 2000, 1999, and 1998, respectively. He elects to use farm income averaging by completing Schedule J to figure his tax.

First, he uses Part IV of Schedule D to figure his tax without regard to farm income averaging. Next, he uses Schedule J to figure his tax using farm income averaging.

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

Line 1. He enters $48,766, his taxable income from line 39 of Form 1040.

Line 2. He enters the part of his farm income he is electing to average, $29,766. He elects to treat this elected farm income as all coming out of his $53,954 of ordinary farm income from Schedule F. He could have elected to treat up to $14,770 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 $19,000 on line 3.

Line 4. Because he has capital gains and losses this year, he computes the tax on $19,000 using Part IV of Schedule D (not shown) and enters the result, $2,076, 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 2001. In that case, the calculation for this line would have been made by reducing his capital gains for 2001 by the amount included in elected farm income and, unless all of the capital gains for 2001 were included in elected farm income, using Schedule D to compute the tax on line 4.

Lines 5, 9, and 13. He enters his taxable income from 1998, 1999, and 2000 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, $9,922, 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 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 2001 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 the 15% rate for each year. However, if he had made a different election to use some or all of the capital gains for 2001, 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, $7,180, on line 17.

Lines 18, 19, and 20. He enters his tax from his 1998, 1999, and 2000 returns on lines 18, 19, and 20, respectively.

Line 21. He adds the amounts on lines 18, 19, and 20 and enters the total, $643, on line 21.

Line 22. He subtracts the amount on line 21 from the amount on line 17 and enters $6,537 on line 22. The tax on this line is less than the $6,902 of tax he figured using Schedule D. Therefore, he enters on line 40 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 not prepared their own tax return, the preparer would also sign the return and provide the information requested at the bottom of the page.) Mr. Brown attaches to the return the address label in the instructions after verifying the accuracy of the label. He writes his and his wife's social security numbers in the boxes next to the address label.

He writes a check payable to the U.S. Treasury for the full amount on line 70 of Form 1040. On the check, he writes his social security number, their telephone number, and "2001 Form 1040." His name and address are printed on the check. Mr. Brown could instead have chosen to pay his taxes by credit card (American Express® Card, Discover® Card, or MasterCard® 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.

1. Schedule A. (07) (not shown)
2. Schedule D. (12)
3. Schedule F. (14)
4. Schedule SE. (17)
5. Schedule J. (20)
6. Form 4136. (23) (not shown)
7. Form 4684. (26)
8. Form 4797. (27)
9. Form 4562. (67)
10. 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

Schedule D (Form 1040) - page 1

Schedule D (Form 1040) - page 2

Schedule F (Form 1040) - page 1

Schedule SE (Form 1040) - page 1

Schedule J (Form 1040) - page 1

Form 4684 - page 2

Form 4797 - page 1

Form 4797 - page 2

Form 4562 - page 1

Form 4562 - page 2

Depreciation Worksheet

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