You or your heirs may receive a lump-sum payment, called a distribution, from your retirement plan or retirement annuity. If you claim this payout as regular income, you may owe more income tax than if you declare this distribution on IRS Form 4972 (Tax on Lump-Sum Distributions). By filing this form with your tax return, you'll have to pay your entire tax debt immediately, but you may get a tax break by doing so.
Qualified Lump-Sum Distributions
The IRS defines a lump-sum distribution as the amount of your entire balance from all of your qualified plans of a single kind from a single employer in a single tax year. Qualifying plans include pension plans, profit-sharing plans and stock bonus plans.
Eligible lump-sum distributions are also those that are paid:
- Upon the plan participant's death
- After the plan participant reaches age 59½
- When the plan participant is no longer an employee of the company that sponsors the plan
- When a self-employed plan participant becomes totally and permanently disabled
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Form 4972 Part I
If you're unsure whether you qualify to file Form 4972, Part I of the form walks you through a series of five questions to determine your eligibility. For example, you cannot use Form 4972 if you rolled over any part of your lump-sum distribution, as noted in Question 2. Also, you can only use Form 4972 one time since 1986 for any previous distributions from your own plan as the beneficiary of a deceased plan participant, as noted in Questions 5a and 5b.
Figuring Form 4972 Tax
Taxpayers can figure their tax liability for qualifying lump-sum distributions by using the 20 percent capital gain method, the 10-year tax option or both. You'll find Form 4972 and its instructions for calculating these two methods by visiting IRS.gov/forms and searching for this form by number. Form 4972 instructions also explain how multiple recipients of a lump-sum distribution should figure their tax liability.
Form 4972 Part II
If your lump-sum distribution includes a capital gain amount, Part II of IRS 4972 walks you through how to calculate your tax liability. You'll find the amount of your capital gain in Box 3 of IRS Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.).
If there's also an amount in Box 6 of your 1099-R, this represents a net unrealized appreciation (NUA), part of which qualifies for capital gain treatment if there's also an amount entered in Box 3. The NUA worksheet in the Form 4972 instructions helps you figure the total amount of your capital gain tax liability.
Form 4972 Part III
Regardless of whether you make the 20 percent capital gain election in Part II, Part III of IRS 4972 walks you through how to calculate your tax liability using the 10-year method. You can use the 10-year method to report the entire balance of your distribution, or you can report part of your eligible distribution as a capital gain and compute the balance using the 10-year tax option.
Filing IRS 4972
If you're eligible to use Form 4972, file it with your original or amended tax return, including Forms 1040, 1040-SR, 1040-NR or 1041. If you're filing Form 4972 with an amended tax return, you typically must file this form within three years after you filed your original return or within two years after the date you paid your tax, whichever date is later.