Income Averaging

Categories: Accounting, Tax,

A method of calculating personal income taxes where taxable income is calculated by an average of the current year's income plus income from the three preceding years. For example, if a person's income for the last five years was $500,000, $600,000, $700,000, $800,000, and $900,000, and $900,000 was the most recent year, the taxable income would be calculated by: ($600,000+$700,000+$800,000+$900,000) / 4 = $750,000. Income averaging was used for individuals with high incomes which would vary from year to year, but the tax reform act of 1986 abolished the practice.