Key Takeaways
- Found property and money is considered taxable income and needs to be reported on tax returns.
- Both cash and tangible property are taxable, and the fair market value of the property should be reported.
- It's important to document the discovery of found property and keep detailed records of any subsequent sale or transfer of ownership for tax purposes.
- Donating found property to a qualified charity can be a way to lower the tax burden.
When income averaging is beneficial
You may wish to consider income averaging if your income from fishing and farming activities for the current tax year is substantially higher than your income from any source over the previous three years. Electing to use Schedule J to average your income allows you to balance your current tax rate with the rates from previous years, so you’re not taxed at a significantly higher rate in the current year. Income from the three previous years, referred to as the base years, doesn’t have to originate from farming or fishing activity.
Farming businesses that qualify for income averaging
The IRS defines a farming business as one involved in the trade of cultivating land or the raising or harvesting of any agricultural or horticultural commodity. This excludes buying and reselling plants or animals raised by someone else, or the harvesting under contract of agricultural or horticultural commodities grown by someone else. Leasing land to a tenant engaged in farming is allowed for income averaging, as long as lease payments are based on a share of the tenant's production, rather than a fixed fee. This agreement also must be in place before the tenant starts farming operations.
TurboTax Tip:
Found property typically needs to be included in income on your state income tax return if you live in a state that taxes this type of income.
Fishing businesses and income averaging
- Fishing business refers to the catching, taking or harvesting of finfish, mollusks, crustaceans, marine animal and plant life, except marine mammals and birds.
- Crew members on commercial fishing vessels qualify only if their income is based on a share of the catch.
- If you own a fishing boat and lease it, you are eligible for income averaging only if lease arrangements are made based on a share of the catch.
- If you are involved in settlement from Exxon Valdez litigation as a plaintiff or beneficiary, you may be considered eligible for fishing income averaging.
Using elected farm income with Schedule J
You're not required to use all of your taxable farm and fishing income from the current year for income averaging, and it may be better to use only a portion. Whatever portion of your income you include, it’s called elected farm income on Schedule J, and it can include gain or loss from the sale of property and assets used in your business. It cannot exceed the taxable income reported on your Form 1040. Schedule J and its instructions guide you through calculation of tax on your current year elected farm income as well as the three base years to calculate your averaged income.
Let a local tax expert matched to your unique situation get your taxes done 100% right with TurboTax Live Full Service. Your expert will uncover industry-specific deductions for more tax breaks and file your taxes for you. Backed by our Full Service Guarantee.
You can also file taxes on your own with TurboTax Premium. We’ll search over 500 deductions and credits so you don’t miss a thing.
