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Last Updated: 7/9/2018

Capital Gain Election on a Lump-sum Distribution

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A qualified lump-sum distribution is the payment of your qualified retirement plan’s entire balance (including pension, profit-sharing, or stock bonus plans) in one tax year after you reach age 59½.

How may I treat my lump-sum distribution for tax purposes?

If you were born before 1936 and meet certain requirements, you may specify the tax treatment of retirement plan distributions using federal Form 4972, Tax on Lump-Sum Distributions. Your choices include:

  • The capital gain election, where you pay a 20 percent tax on the capital gain portion of your distribution.
  • The 10-year tax option, where you pay tax on the total taxable amount based on a 10-year average.

These choices may reduce your tax from what it would have been if you did not use federal Form 4972 and reported your distribution as ordinary income.

Note: If you qualify for the capital gain or 10-year tax option, you must calculate the tax on your distribution directly on federal Form 4972. Do not report the distribution separately as part of taxable income on your federal return.

How do I report my lump-sum distribution on my Minnesota return?

Minnesota reporting depends on what federal tax treatment you choose. See the table below.

If you Then you
Use federal Form 4972 to choose the 10-year tax option

Must calculate the Minnesota tax due on the taxable part of your distribution.
Use Schedule M1LS, Tax on Lump-Sum Distribution. ​ ​

Use federal Form 4972 to choose the capital gain election Must add back the capital gain portion of the distribution to taxable income. 
Use Schedule M1M, Income Additions and Subtractions.*​
Do not use federal Form 4972 and treat the distribution as ordinary income Do not need to file Schedule M1LS. Your distribution is included in your federal taxable income.
*If you choose both the capital gain election and the 10-year tax option for part of your distribution, you must include Schedule M1M and Schedule M1LS with your Minnesota return.
 
For more information on lump-sum distributions, see Minnesota Statute 290.0131, subdivision 4, and Lump-Sum Distributions on the IRS website.