Fill out Part I. This is a series of yes or no questions to determine whether you qualify to file Form 4972.
Complete the net unrealized appreciation (NUA) worksheet found on page 3 if you have a NUA value in box 6 of your Form 1099-R and you want to use the 20 percent option for it.
Complete the death benefit worksheet on page 3 if you have inherited the plan. If you are completing the NUA worksheet, include the value from Line G in Line A of this form. Determine your share of the death benefit exclusion by multiplying $5,000 by your percentage of the total plan payments. If you are the sole beneficiary, you would enter $5,000.
Enter the capital gains part from Form 1099-R, found in box 3, on the first line of Part II if you are using the 20 percent option. If you completed the death benefit worksheet, enter the value from line F in box 6. If you did not complete the death benefit worksheet but did complete the NUA worksheet, use the value from Line G of the NUA in box 6 of Part II. Now you multiply the value in box 6 by 0.2 to get the capital gains tax. Enter that value in box 7.
Figure your remaining taxable income. If you did not elect to use the 20 percent option, this will be the value in box 2a of Form 1099-R. If you did elect to use the 20 percent option, then it is the value in box 2a minus the value in box 3. If you have remaining taxable income, you must fill out Part II; otherwise, you may skip this section.
Enter your remaining taxable income in line 8. Continuing filling out Part III, following the instructions on each line. If you filled out the death benefit worksheet, enter the death benefit exclusion in line 9.
Use the Tax Rate Schedule on page 4 to determine the values for lines 24 and 27. To do this, you will use the amounts in lines 23 and 26 respectively. Find the value in the ranges between the values in the first two columns of the Tax Rate Schedule. Once you find the applicable line, go to the the fourth column of that line. Subtract the number in the fourth column from your starting value and multiply it by the percent, in decimal form, in the third column and add the other number in the third column.
For example, if your value was $7,690, you would go down to line 5 of the Tax Rate Schedule. Subtract the value in column 4 ($6,690) from $7,690: $7,690 - $6,690 = $1,000. Then multiply the result by the percent in column 3 (0.16): $1,000 * 0.16 = $160. Finally add 900.9 as found in column 3: $160 + 900.9 = $1060.9.
Calculate line 30 by adding lines 7 and 29. Include this amount on your 1040 on line 44, Form 1040NR, line 41, or Form 1041, Schedule G, line 1b, as appropriate. Attach this Form 4972 to your tax returns; retain a copy for your records.