Income Averaging Techniques refer to methods used to calculate an individual’s average income over a specified period, typically to smooth out fluctuations in income for tax purposes.
These techniques are especially relevant for individuals with variable income, such as farmers or fishermen, whose earnings can significantly change from year to year. By averaging income, taxpayers can potentially lower their taxable income during high-income years and reduce their overall tax liability.
For example, if a farmer earns $100,000 in one year and $20,000 in the next, the income averaging technique would allow them to spread this income over the two years, resulting in an average income of $60,000 per year. This can place them in a lower tax bracket and reduce the amount owed in taxes.
« Back to Glossary Index