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What Is a 10-Year Tax Option?

Q. Tim R. of Massachusetts asks: "What is a 10-Year Tax Option?"

A. Spencer Olsen of Pension Evaluators® at Troyan Inc.®, responds: "The 10-year tax 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, rather than over the next 10 years. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. "

The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount (if any) shown in box 3. You can also treat the capital gain part of the distribution (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.

Complete Part III of Form 4972 to choose the 10-year tax option. You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax.

Spencer Olsen

Senior Pension Analyst

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