How to Report Lump Sum Distributions

If you were born before January 2, 1936, you may be eligible for alternate methods for determining the tax on lump-sum distributions from an employer qualified plan. The entire balance must be paid out in one year on qualifying plans, such as pensions and profit-sharing. Follow these steps to reduce your tax burden on lump-sum distributions.

Difficulty: Moderately Easy

Instructions

1. Receive a Form 1099-R from the company paying you a lump-sum distribution. Amounts pertaining to post-1973 are shown as ordinary income in Box 2a of Form 1099-R. Income from pre-1974 years are reported as capital gains in Box 3.

2. Print Form 4972 from the IRS website to determine the separate lump-sum distribution tax using the optional methods if were born before January 2, 1936. If you were born after the cutoff date, then you are not eligible to use Form 4972 and simply add the lump-sum distribution to all other taxable income on your tax return.

3. Complete Part II of Form 4972 using the amount shown in Box 3 of Form 1099-R. This amount is taxed at the lower capital gains rate of 20 percent.

4. Compute the 10-year tax option using Part III of Form 4972. The formula calculates a one-time tax on the ordinary income reported in Box 2a of Form 1099-R rather than paying taxes over a 10-year period. Usually this results in a lower tax.

5. Add the separate tax determined on Form 4972 for the lump-sum distribution using the optional methods to your regular tax computed on all other taxable income.

Tips & Warnings

• Payouts from nonqualified plans, such as an individually purchased annuity, do not qualify as a lump-sum distribution.