Publication 575 - Pension And Annuity Income - 2002 Page 19
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34Amended 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
change with the Form 1040X.
Capital Gain Treatment
How to report. If you elect capital gain treatment (but
Capital gain treatment applies only to the taxable part of a
not the 10-year tax option) for a lump-sum distribution,
include the ordinary income part of the distribution on lines
lump-sum distribution resulting from participation in the
plan before 1974. The amount treated as capital gain is
16a and 16b of Form 1040. Enter the capital gain part of
the distribution in Part II of Form 4972.
taxed at a 20% rate. You can elect this treatment only once
for any plan participant, and only if the plan participant was
If you elect the 10-year tax option, do not include any
born before 1936.
part of the distribution on lines 16a or 16b of Form 1040.
Complete Part II of Form 4972 to choose the 20%
Report the entire distribution in Part III of Form 4972 or, if
you also elect capital gain treatment, report the capital gain
capital gain election.
part in Part II and the ordinary income part in Part III.
Figuring the capital gain and ordinary income parts.
Include the tax from line 30 of Form 4972 on line 42 of
Generally, figure the capital gain and ordinary income
Form 1040.
parts of a lump-sum distribution by using the following
formulas.
Taxable and tax-free parts of the distribution. The tax-
able part of a lump-sum distribution is the employer’s
Capital Gain:
contributions and income earned on your account. You
Total
may recover your cost in the lump sum and any net
unrealized appreciation (NUA) in employer securities tax
Taxable
x
Months of active participation before 1974
free.
Amount
Total months of active participation
Cost. In general, your cost is the total of:
Ordinary Income:
•
The plan participant’s nondeductible contributions to
Total
the plan,
Taxable
x
Months of active participation after 1973
•
The plan participant’s taxable costs of any life insur-
Amount
Total months of active participation
ance contract distributed,
•
In figuring the months of active participation before
Any employer contributions that were taxable to the
1974, count as 12 months any part of a calendar year in
plan participant, and
which the plan participant actively participated under the
•
Repayments of any loans that were taxable to the
plan. For active participation after 1973, count as one
plan participant.
month any part of a calendar month in which the participant
actively participated in the plan.
You must reduce this cost by amounts previously distrib-
The capital gain part should be shown in box 3 of Form
uted tax free.
1099 –R or other statement given to you by the payer of the
NUA. The NUA in employer securities (box 6 of Form
distribution.
1099 –R) received as part of a lump-sum distribution is
Reduction for federal estate tax. If any federal estate
generally tax free until you sell or exchange the securities.
tax (discussed under Survivors and Beneficiaries, later)
(See Distributions of employer securities under Figuring
was paid on the lump-sum distribution, you must decrease
the Taxable Amount, earlier.) However, if you choose to
the capital gain by the amount of estate tax applicable to it.
include the NUA in your income for the year of the distribu-
Follow the Form 4972 instructions for Part II, line 6, to
tion and there is an amount in box 3 of Form 1099 – R, part
figure the part of the estate tax applicable to the capital
of the NUA will qualify for capital gain treatment. Use the
gain and the part applicable to the ordinary income. If you
NUA Worksheet in the instructions for Form 4972 to find
do not make the capital gain election, enter on line 18 of
the part that qualifies.
Part III the estate tax attributable to both parts of the
lump-sum distribution. For information on how to figure the
Losses. You may be able to claim a loss on your return if
estate tax attributable to the lump-sum distribution, get the
you receive a lump-sum distribution that is less than the
instructions for Form 706, United States Estate (and
plan participant’s cost. You must receive the distribution
Generation-Skipping Transfer) Tax Return, or contact the
entirely in cash or worthless securities. The amount you
administrator of the decedent’s estate.
can claim is the difference between the participant’s cost
and the amount of the cash distribution, if any.
To claim the loss, you must itemize deductions on
10-Year Tax Option
Schedule A (Form 1040). Show the loss as a miscellane-
ous deduction subject to the 2%-of-adjusted-gross-
The 10-year tax option is a special formula used to figure a
income limit.
separate tax on the ordinary income part of a lump-sum
You cannot claim a loss if you receive securities that are
distribution. You pay the tax only once, for the year in
not worthless, even if the total value of the distribution is
which you receive the distribution, not over the next 10
Page 19
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