2569435
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Attend our Ask the Experts event about Tax Law Changes - One Big Beautiful Bill on Aug 6! >> RSVP NOW!
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

tax on a lump sum distribution

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

x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

1 Best answer

Accepted Solutions
dmertz
Level 15

tax on a lump sum distribution

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.

View solution in original post

5 Replies
GeorgeM777
Expert Alumni

tax on a lump sum distribution

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

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
dmertz
Level 15

tax on a lump sum distribution

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

tax on a lump sum distribution

The code is 4

dmertz
Level 15

tax on a lump sum distribution

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.

tax on a lump sum distribution

Thanks!

Unlock tailored help options in your account.

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question