This Daily Tax Tip Spotify Podcast and/or WordPress Blog Post is intended to assist Older Participants with Lump Sum Distributions.
If you receive a lump sum distribution on behalf of a qualified plan participant who was born before January 2, 1936, you have the following options for calculating the tax on the taxable part of the distribution:
(1) Report the part of the distribution from participation before 1974 as a capital gain and the part from participation after 1973 as ordinary income;
(2) report the part of the distribution from participation before 1974 as a capital gain and use a 10-year averaging option to figure the tax on the part from participation after 1973;
(3) use the 10-year averaging option to figure the tax on the total taxable amount;
(4) roll over all or part of the distribution (no tax will be currently due on the part rolled over, and any part not rolled over will be currently taxed as ordinary income); or
(5) report the entire taxable part of the distribution as ordinary income.
Each individual, estate, or trust that receives part of a lump-sum distribution on behalf of a plan participant who was born before January 2, 1936, can choose whether to elect the optional methods for the part each received. A taxpayer who receives a distribution as an alternate payee under a qualified domestic relations order can choose the optional tax computations for a distribution that would be treated as a lump-sum distribution had it been received by the taxpayer’s spouse or former spouse.
An election to use the capital gain or averaging tax option must be made before the end of the time, including extensions, for making a claim for credit or refund of tax (usually three years after the date the return was filed or two years after the date the tax was paid, whichever is later). Returns filed before their due date are considered filed on their due date. You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant.
The 10-year averaging option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years.
If you will be receiving a lump-sum distribution on behalf of a qualified plan participant who was born before January 2, 1936, please call me at your convenience so we can discuss your options for calculating the tax on the taxable part of the distribution.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 07132021-1 320-795)