tax on a lump sum distribution

[hilliarddebbie]

On a lump sum death beneficiary distribution, do I use the special averaging method or do I use a different method?. I have tried both methods- one i owe  a huge amount of tax, the other i receive a small refund and the other method i receive a larger refund. There was no death benefit exclusion.  What do I do! help

[GeorgeM777]

It depends.  Generally, you will be expected to pay taxes on lump-sum IRA distributions in the year you receive them, and as you have noticed the taxes can be huge. 

Here is a fact that weighs in favor of using income averaging: you are likely to pay a much lower amount than you would if you had not opted for income averaging.  However, it is important to keep in mind that the income averaging calculations are based on the 1986 tax rates.  In 1986, a tax rate of 50 percent was what the highest earners paid. Therefore, if your lump sum is significant, you will not benefit much from income averaging.  Also, once you take advantage of the process, you cannot defer taxes on those funds.

The process you used to see how your tax changed is an excellent way to answer your question.  Ultimately, it depends on what you want to receive or pay.  According to the IRS, you pay the tax only once, for the year in which you receive the distribution, not 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.

@hilliarddebbie

[dmertz]

What is the code in box 7 of the Form 1099-R provided by the payer?

[hilliarddebbie]

The code is 4

[dmertz · Accepted solution]

You would choose to use or not use the 10-year averaging based on which produces the lower tax liability for the year that the distribution was made.  As GeorgeM777 said, your choice has no effect on future tax years.

[hilliarddebbie]

Thanks!