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Last Updated: 1/31/2017

Capital Gain Election on a Lump-sum Distribution

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A qualified lump-sum distribution is the payment of the entire balance of a taxpayer’s qualified retirement plan (pension, profit-sharing or stock bonus plan) in one tax year after the taxpayer has reached age 59½.
 

Capital Gain Election and 10-year Tax Option

Under certain conditions, taxpayers born before 1936 may specify the tax treatment of retirement plan distributions using federal Form 4972, Tax on Lump-Sum Distributions. The choices include:
  • capital gain election (pay a 20 percent tax on the capital gain portion of the distribution); and
  • 10-year tax option (pay tax on the total taxable amount, based on a 10-year average).
These choices may reduce the amount of tax from what it would have been if the distribution were reported as ordinary income (without using Form 4972). The federal tax treatment chosen determines which Minnesota forms the taxpayer must complete.
 
Note: Taxpayers who are eligible for the capital gain and/or 10-year tax option must calculate the tax on their distribution directly on Form 4972. Don’t report the distribution separately as part of taxable income on the federal return.
 

Forms to Use on the Minnesota Return

How a lump-sum distribution is reported on a taxpayer’s Minnesota return depends on the federal tax treatment chosen, as shown in the table below
For this federal tax treatment​ Do this on your state return…​ … using this Minnesota form​
You choose the 10-Year Tax Option (using Form 4972)​ Calculate the Minnesota tax due on taxable portion of your distribution​ Schedule M1LS, Tax on Lump-Sum Distribution
You choose the Capital Gain Election (using Form 4972)​ Add back the capital gain portion of the distribution to taxable income​ Schedule M1M, Income Additions and Subtractions*​
You treat the distribution as ordinary income (no Form 4972)​ Nothing – the distribution is included with your federal taxable income​ No separate form is required​
 *  If a taxpayer chooses both the capital gain election and the 10-year tax option for part of their distribution, they must include Schedule M1M and Schedule M1LS with their Minnesota return.
 
For more information on lump-sum distributions: