Filing Form 4972 for a Qualifying Lump-Sum Distribution

Form 4972, Tax on Lump-Sum Distributions, provides a special method for calculating the tax on a qualifying distribution from a retirement plan. This calculation can sometimes lead to a lower tax liability compared to treating the funds as ordinary income for the year. The form allows eligible individuals to use methods that treat the distribution differently for tax purposes. This approach is designed for specific circumstances and is not available to all recipients of retirement funds.

Determining Eligibility for Special Tax Treatment

The Participant’s Requirements

Eligibility for using Form 4972 is restricted and depends heavily on the plan participant’s personal details. The primary requirement is that the plan participant must have been born before January 2, 1936. Another condition is that the individual must have been a participant in the retirement plan for a minimum of five full tax years before the year the distribution is made. This rule ensures that the special tax treatment is reserved for long-term plan participants.

The Distribution’s Requirements

The nature of the distribution itself is subject to strict definition. To qualify as a lump-sum distribution, the recipient must receive the entire balance from all of the employer’s qualified plans of the same type within a single tax year. For example, if an employer maintains multiple pension plans, the balances of all those plans must be distributed. This “all or nothing” rule prevents individuals from taking partial distributions to manipulate their tax situation over several years.

The Triggering Event

A qualifying distribution must be prompted by a specific life event. The payment must be made for one of the following reasons:

• Because of the plan participant’s death.
• After the participant reaches age 59½.
• Due to the employee’s separation from service.
• After a self-employed individual becomes totally and permanently disabled (separation from service is not a qualifying trigger for them).

Information Needed to Complete Form 4972

Primary Source Document (Form 1099-R)

Successfully completing Form 4972 hinges on having the correct information, which is provided on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. You will need:

• The gross distribution amount from Box 1.
• The taxable amount from Box 2a.
• The amount eligible for capital gain treatment found in Box 3 (if applicable).
• The value of any net unrealized appreciation in employer’s securities from Box 6.

Obtaining the Form

The form and its accompanying instructions can be downloaded directly from the official IRS website, www.irs.gov. Using the correct year’s form is important, as tax laws and forms can change. The instructions provide the specific tax rate schedules and other details needed to perform the calculations accurately.

Calculating the Tax Using Form 4972

Capital Gain Election

For those whose distribution includes participation in the plan before 1974, a capital gain election is available. This option, handled in Part II of Form 4972, allows a portion of the distribution to be taxed at a 20% rate. The specific amount eligible for this treatment is reported in Box 3 of your Form 1099-R.

10-Year Tax Option

This method does not mean you pay the tax over ten years; rather, it is a calculation that treats the distribution as if it were received over a decade. The process begins by taking the total taxable amount of the distribution, subtracting a minimum distribution allowance, and then dividing the result by 10. You then apply the tax rates from the Tax Rate Schedule found in the Form 4972 instructions to this smaller, one-tenth portion. The resulting tax is then multiplied by 10 to determine the total tax for the ordinary income part of the distribution.

Final Tax Calculation

The final step on the form is to combine the tax liabilities calculated in the previous parts. You will add the tax from the capital gain portion to the tax calculated using the 10-year option. This final figure is the amount you will carry over to your main income tax return.

Filing Form 4972 with Your Tax Return

How to Submit

Once Form 4972 is fully completed, it must be filed with your annual income tax return. You should attach the form to your Form 1040, 1040-SR for seniors, or Form 1040-NR for non-resident aliens. For estates or trusts, the form is attached to Form 1041.

Reporting the Tax

The final tax amount calculated on Form 4972 must be correctly reported on your primary tax form. The total tax is entered on line 16 of Form 1040, 1040-SR, or 1040-NR. You must also check box 2 on line 16 to indicate that Form 4972 has been filed. For estates and trusts, the amount is reported on Form 1041, Schedule G, line 1b.