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Simple English definitions for legal terms
income averaging
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A quick definition of income averaging:
Income averaging is a way of calculating taxes by combining a person's current income with their income from previous years. This method is used to help people who have fluctuating or irregular income, such as authors, actors, and athletes, who face different tax rates each year. Income averaging allows them to pay taxes based on their average income over a period of time, rather than just their income for one year. However, income averaging was repealed in 1986 and is no longer available as an option for taxpayers.
A more thorough explanation:
Definition: Income averaging is a method of calculating taxes by averaging a person's current income with their income from previous years.
For example, if someone earned a lot of money one year but very little the next, income averaging would allow them to spread out their income over those two years and pay a lower tax rate overall.
This method is especially helpful for people who have fluctuating or bunched income, such as authors, actors, and athletes, who may face higher tax rates in years when they earn more money.
Overall, income averaging is a way to make taxes more fair for people whose income varies from year to year.