Everything You Need to Know About Form 4972

What is Form 4972?
Form 4972 helps taxpayers calculate a potentially lower tax on a lump-sum distribution from a qualified retirement plan. Instead of being taxed at the higher marginal rate for that year, the IRS allows eligible individuals to apply 10-year averaging or capital gains tax rates, both of which can significantly reduce taxes on retirement payouts.

Who Can Use Form 4972?
You may qualify to use Form 4972 if:

• You received the entire balance of your qualified plan in one tax year.
• You participated in the plan for at least five years before the distribution.
• You have not previously used Form 4972 for another distribution from the same plan.
• The distribution is from an employer plan (not an IRA or 401(k) rollover).

This form is also applicable to beneficiaries receiving a lump-sum payment from a deceased participant who met the above criteria.

Why It Matters
Lump-sum distributions can push your income into a higher tax bracket, resulting in substantial tax liability. Form 4972 provides two possible tax benefits:

• 10-Year Averaging: Spreads your distribution’s tax effect over 10 years, reducing the annual impact.
• Capital Gain Treatment: Allows part of the distribution to be taxed at long-term capital gain rates instead of regular income tax rates.

These options were created to ease the tax burden for long-time employees receiving large retirement payouts.

Key Information Required
When completing Form 4972, you’ll need:

• Your Form 1099-R, showing the total distribution and taxable amount.
• Your birth date and years of plan participation.
• Information on whether the plan includes pre-1974 participation for capital gain treatment.
• The employer’s plan type and identification details.

Important Considerations

• Once you elect to use Form 4972, you generally cannot change that election later.
• Using this form for one plan prevents its use again for future distributions from the same plan.
• You cannot apply 10-year averaging or capital gain treatment to IRAs or Roth accounts.
• Keep a copy of your Form 4972 for future reference, especially for estate or inheritance planning.