The 10-year tax option is an equation used to calculate a single tax on the ordinary income part of a lump-sum distribution. The option allows the taxpayer to pay the tax only once (the tax must be paid the year that the lump-sum funds were received), and not over a ten year period. You can, however, choose this option only once for any associate included in the distribution and only if the associate was born before 1936.
What are the qualifications for the 10 year tax option?
The following tests must be met, in order to qualify for the 10 year tax option:
- The funds must be from an annuity or a tax-qualified retirement plan; allotments from IRAs do not qualify.
- The allotment of the entire balance from the disposition (not including employee contributions) has be made in one taxable year. If any part of the allotment is rolled over, the distribution does not qualify.
- The associate must have been born before January 2, 1936. The associate must meet this requirement in order for income averaging to be designated by beneficiaries.
- he associate must have been in the plan for at least five years before the allocation (does not apply if payment is made to beneficiaries).
- For any earlier allocation, distributed after 1986, the associate must not have used the income averaging provision.
- The distribution must be payable
- on account of a common law employee's separation from service
- after the employee reaches age 59 ½;
- after a self-employed individual has become disabled ; or
- on account of the employee's death
A qualifying plan participant (or his or her beneficiary) would use 10 year income averaging if most of the money is needed now for day to day living expenses or to cover medical or other pressing bills. If most or all of the money is going to be withdrawn anyway, it’s best to use 10 year averaging and pay less tax.
Conversely, if the plan balance is large and most of the money is not needed now, then it would better to roll the funds over to an IRA and withdraw only what is needed. This way, they are not forced to pay tax on money that they don’t need right now.
Complete the worksheet to determine if you qualify for the ten year averaging system. Enter the tax from the Lump Sum Distribution Averaging Schedule. This amount will be entered on Line 29 of the AR2 form.
You should not use AR1000TD if the distribution was passed through an estate.
- State Section