Publication 575 - Pension And Annuity Income - 2004 Page 20
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36You can also treat the capital gain part of the distribution
Capital Gain:
(box 3 of Form 1099-R) as ordinary income for the 10-year
tax option if you do not choose capital gain treatment for
that part.
Total
x
Months of active participation before 1974
Taxable
Complete Part III of Form 4972 to choose the 10-year
Amount
Total months of active participation
tax option. You must use the special tax rates shown in the
instructions for Part III to figure the tax.
Ordinary Income:
Examples
Total
x
Months of active participation after 1973
Taxable
The following examples show how to figure the separate
Amount
Total months of active participation
tax on Form 4972.
In figuring the months of active participation before
1974, count as 12 months any part of a calendar year in
Example 1. Robert C. Smith, who was born in 1935,
which the plan participant actively participated under the
retired from Crabtree Corporation in 2004. He withdrew the
plan. For active participation after 1973, count as one
entire amount to his credit from the company’s qualified
month any part of a calendar month in which the participant
pension plan. In December 2004, he received a total distri-
actively participated in the plan.
bution of $175,000 ($25,000 of employee contributions
The capital gain part should be shown in box 3 of Form
plus $150,000 of employer contributions and earnings on
1099-R or other statement given to you by the payer of the
all contributions).
distribution.
The payer gave Robert a Form 1099-R, which shows
Reduction for federal estate tax. If any federal estate
the capital gain part of the distribution (the part attributable
tax (discussed under Survivors and Beneficiaries, later)
to participation before 1974) to be $10,000. Robert elects
was paid on the lump-sum distribution, you must decrease
20% capital gain treatment for this part. A filled-in copy of
the capital gain by the amount of estate tax applicable to it.
Robert’s Form 1099-R and Form 4972 follow. He enters
Follow the Form 4972 instructions for Part II, line 6, to
$10,000 on Form 4972, Part II, line 6, and $2,000 ($10,000
× 20%) on Part II, line 7.
figure the part of the estate tax applicable to the capital
gain and the part applicable to the ordinary income. If you
The ordinary income part of the distribution is $140,000
do not make the capital gain election, enter on line 18 of
($150,000 minus $10,000). Robert elects to figure the tax
Part III the estate tax attributable to both parts of the
on this part using the 10-year tax option. He enters
lump-sum distribution. For information on how to figure the
$140,000 on Form 4972, Part III, line 8. Then he completes
estate tax attributable to the lump-sum distribution, get the
the rest of Form 4972 and includes the tax of $24,270 in
instructions for Form 706, United States Estate (and
the total on line 43 of his Form 1040.
Generation-Skipping Transfer) Tax Return, or contact the
administrator of the decedent’s estate.
Example 2. Mary Brown, who was born in 1935, sold
her business in 2004. She withdrew her entire interest in
the qualified profit-sharing plan she had set up as the sole
10-Year Tax Option
proprietor.
The cash part of the distribution, $160,000, is all ordi-
The 10-year tax option is a special formula used to figure a
nary income and is shown on her Form 1099-R (see page
separate tax on the ordinary income part of a lump-sum
22). She chooses to figure the tax on this amount using the
distribution. You pay the tax only once, for the year in
10-year tax option. Mary also received an annuity contract
which you receive the distribution, not over the next 10
as part of the distribution from the plan. Box 8, Form
years. You can elect this treatment only once for any plan
1099-R, shows that the current actuarial value of the annu-
participant, and only if the plan participant was born before
ity was $10,000. She enters these figures on Form 4972
January 2, 1936.
(see page 23).
The ordinary income part of the distribution is the
After completing Form 4972, she includes the tax of
amount shown in box 2a of the Form 1099-R given to you
$28,070 in the total on line 43, Form 1040.
by the payer, minus the amount, if any, shown in box 3.
Page 20
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