Income Averaging

Updated: 29 February 2024

What Does Income Averaging Mean?

Income averaging is a method of calculating a person's income by averaging their earnings over a multiple year period.

Earnings from insurance policies such as life insurance could be included as part of a person's income, which would be added to their yearly total and then factored into an income averaging calculation.

Insuranceopedia Explains Income Averaging

Government regulation from 1986 eliminated the practice of using income averaging to calculate income for tax purposes. Because of these changes, Americans have to calculate their incomes every single year and use this figure when filing their taxes.

Earnings from life insurance and other insurance benefits can still be factored into tax calculations, but only those acquired during the given tax year. Many taxpayers opt to use the services of an accountant to calculate their taxable income.

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