Publication 575 - Pension And Annuity Income - 2004 Page 19
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36the 10-year tax option to figure the tax on the part
Cost. In general, your cost is the total of:
from participation after 1973 (if you qualify).
•
The plan participant’s nondeductible contributions to
•
Use the 10-year tax option to figure the tax on the
the plan,
total taxable amount (if you qualify).
•
The plan participant’s taxable costs of any life insur-
•
Roll over all or part of the distribution. See Rollovers,
ance contract distributed,
later. No tax is currently due on the part rolled over.
•
Any employer contributions that were taxable to the
Report any part not rolled over as ordinary income.
plan participant, and
•
Report the entire taxable part of the distribution as
•
Repayments of any loans that were taxable to the
ordinary income on your tax return.
plan participant.
The first three options are explained in the following
You must reduce this cost by amounts previously distrib-
discussions.
uted tax free.
NUA. The NUA in employer securities (box 6 of Form
Electing optional lump-sum treatment. You can
1099-R) received as part of a lump-sum distribution is
choose to use the 10-year tax option or capital gain treat-
generally tax free until you sell or exchange the securities.
ment only once after 1986 for any plan participant. If you
(See Distributions of employer securities under Figuring
make this choice, you cannot use either of these optional
the Taxable Amount, earlier.) However, if you choose to
treatments for any future distributions for the participant.
include the NUA in your income for the year of the distribu-
Complete Form 4972 and attach it to your Form 1040 if
tion and there is an amount in box 3 of Form 1099-R, part
you choose to use the tax options. If you received more
of the NUA will qualify for capital gain treatment. Use the
than one lump-sum distribution for a plan participant during
NUA Worksheet in the instructions for Form 4972 to find
the year, you must add them together in your computation.
the part that qualifies.
If you and your spouse are filing a joint return and you both
have received a lump-sum distribution, each of you should
Losses. You may be able to claim a loss on your return if
complete a separate Form 4972.
you receive a lump-sum distribution that is less than the
Time for choosing. You must decide to use the tax
plan participant’s cost. You must receive the distribution
options before the end of the time, including extensions, for
entirely in cash or worthless securities. The amount you
making a claim for credit or refund of tax. This is usually 3
can claim is the difference between the participant’s cost
years after the date the return was filed or 2 years after the
and the amount of the cash distribution, if any.
date the tax was paid, whichever is later. (Returns filed
To claim the loss, you must itemize deductions on
before their due date are considered filed on their due
Schedule A (Form 1040). Show the loss as a miscellane-
date.)
ous deduction subject to the 2%-of-adjusted-gross-
income limit.
Changing your mind. You can change your mind and
decide not to use the tax options within the time period just
You cannot claim a loss if you receive securities that are
discussed. If you change your mind, file Form 1040X,
not worthless, even if the total value of the distribution is
Amended U.S. Individual Income Tax Return, with a state-
less than the plan participant’s cost. You recognize gain or
ment saying you do not want to use the optional lump-sum
loss only when you sell or exchange the securities.
treatment. You must pay any additional tax due to the
A loss under a nonqualified plan, such as a com-
change with the Form 1040X.
TIP
mercial variable annuity, is deductible in the
How to report. If you elect capital gain treatment (but
same manner as a lump-sum distribution.
not the 10-year tax option) for a lump-sum distribution,
include the ordinary income part of the distribution on Form
1040, lines 16a and 16b. Enter the capital gain part of the
Capital Gain Treatment
distribution in Part II of Form 4972.
Capital gain treatment applies only to the taxable part of a
If you elect the 10-year tax option, do not include any
lump-sum distribution resulting from participation in the
part of the distribution on Form 1040, lines 16a or 16b.
plan before 1974. The amount treated as capital gain is
Report the entire distribution in Part III of Form 4972 or, if
taxed at a 20% rate. You can elect this treatment only once
you also elect capital gain treatment, report the capital gain
for any plan participant, and only if the plan participant was
part in Part II and the ordinary income part in Part III.
born before January 2, 1936.
Include the tax from Form 4972, line 30 on Form 1040,
line 43.
Complete Part II of Form 4972 to choose the 20%
capital gain election.
Taxable and tax-free parts of the distribution. The tax-
able part of a lump-sum distribution is the employer’s
Figuring the capital gain and ordinary income parts.
contributions and income earned on your account. You
Generally, figure the capital gain and ordinary income
may recover your cost in the lump sum and any net unreal-
parts of a lump-sum distribution by using the following
ized appreciation (NUA) in employer securities tax free.
formulas.
Page 19
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