IRS Form 4972: 10-Year Averaging and Pre-1974 Capital Gain

IRS Form 4972 instructions apply to a narrow group: if you were born before January 2, 1936, or you’re receiving a distribution as the beneficiary, estate, or trust of someone who was, the form lets you calculate a separate tax on a qualifying lump-sum distribution from a qualified retirement plan. The calculation uses 10-year averaging on 1986 single-filer rates for the ordinary income portion, plus an optional flat 20% rate on any pre-1974 capital gain amount. You complete it in four parts, attach it to your return, and carry the resulting tax to Schedule 2 of Form 1040.

Confirm You Qualify Before You Start

Every eligibility rule must be met. Miss one and the form doesn’t apply.¹

The plan participant was born before January 2, 1936.
The payout is the entire balance from all of the employer’s qualified plans of the same kind (all pension, all profit-sharing, or all stock bonus plans), paid within a single tax year.²
The distribution was triggered by the participant’s death, separation from service (common-law employees only), disability (self-employed participants only), or reaching age 59½.²
The participant was in the plan for at least five tax years before the distribution year. This rule is waived for distributions to a beneficiary after the participant’s death.¹
No part of the distribution was rolled over into another qualified plan or IRA. Even a partial rollover disqualifies what’s left.¹
Form 4972 has not already been used for a prior distribution tied to this same participant. Only one election is allowed per employee after 1986.³

Part I of the form walks through these screens as yes/no questions. A disqualifying answer stops the calculation.

Pull Your Numbers From Form 1099-R

Your plan administrator sends Form 1099-R reporting the distribution. Four boxes feed Form 4972:⁴

Box 1, gross distribution: the total paid out, including any after-tax contributions.
Box 2a, taxable amount: the portion subject to tax. This is your working number.
Box 3, capital gain: the slice attributable to plan participation before 1974. This amount is included in Box 2a but gets the separate 20% rate.
Box 4, federal income tax withheld: already sent to the IRS by the administrator. It doesn’t enter the Form 4972 math, but you claim it as a credit on Form 1040.

If you joined the plan after 1973, Box 3 is zero and you skip Part III of the form.

Part II: The 10-Year Averaging Calculation

Part II handles the ordinary income portion of the distribution. The math has several moving pieces, and the Minimum Distribution Allowance is the step that trips most people up.

Isolate the Ordinary Income

Subtract Box 3 from Box 2a. The result is the ordinary income amount Part II will tax. If Box 3 is zero, the full Box 2a amount is ordinary income.

Figure the Minimum Distribution Allowance

The MDA reduces the taxable base for smaller distributions and phases out entirely at $70,000. If your adjusted total taxable amount is $70,000 or more, skip this step and enter zero.¹

Below $70,000, calculate in three steps:

Multiply the adjusted total taxable amount by 50%, capped at $10,000.
Subtract $20,000 from the adjusted total taxable amount. If the result is zero or negative, the phase-out is zero.
Multiply the Step 2 figure by 20%, then subtract that from the Step 1 figure. The remainder is your MDA.

Worked example at $15,000: Step 1 gives $7,500 (half of $15,000, well under the cap). Step 2 is zero because $15,000 is below $20,000. The MDA is $7,500. Worked example at $45,000: Step 1 is capped at $10,000. Step 2 is $25,000, and 20% of that is $5,000. The MDA is $10,000 minus $5,000, or $5,000.

Add the $2,300 Initial Amount and Divide by 10

Subtract the MDA from the ordinary income amount (never below zero), then add $2,300. That $2,300 reproduces the 1986 zero-bracket amount built into the formula. It is not additional income.³

Divide that combined figure by 10. This one-tenth slice is what the averaging method taxes.

Apply the 1986 Single-Filer Tax Rate Schedule

Look up the tax on the one-tenth amount using the 1986 single-filer rate schedule printed in the Form 4972 instructions. Your actual filing status does not matter; the single-filer schedule applies regardless.¹

Then calculate the tax on just the $2,300 using the same schedule. Subtract that smaller tax from the tax on the one-tenth figure. This backs out the artificial $2,300 add-on so you’re left with the true tax on one-tenth of your adjusted ordinary income.

Multiply the result by 10. That’s the Part II tax on the ordinary income portion.

Part III: The 20% Rate on Pre-1974 Capital Gain

Part III applies only if Box 3 of your 1099-R is greater than zero. Multiply the Box 3 amount by 0.20 and that’s the Part III tax.¹

The 20% rate is flat. The MDA, the $2,300 adjustment, and the 1986 schedule have no effect on this portion. Because a participant would have had to begin contributing before 1974, the capital gain slice is usually small for anyone still filing the form.

Part IV: Combine and Report

Part IV adds the Part II tax to the Part III tax (if any). The sum is your total special tax on the distribution. It is self-contained and is not combined with your other income for rate purposes.

Report the combined figure on Schedule 2 of Form 1040 or Form 1040-SR as an additional tax, and attach the completed Form 4972 to the return. Estates and trusts attach it to Form 1041; nonresident aliens attach it to Form 1040-NR.¹ If you don’t attach the form, the IRS treats the full distribution as ordinary income.

The withholding reported in Box 4 of your 1099-R is claimed as a credit on Form 1040 the same way as any other federal withholding. It doesn’t appear anywhere on Form 4972.

If the Distribution Includes Employer Stock

Shares of employer stock in the distribution raise a separate issue called Net Unrealized Appreciation, which is the difference between the plan’s cost basis in the stock and its market value on the distribution date.¹

By default, the NUA is not taxed when you receive the shares. It’s deferred until you sell, then taxed as long-term capital gains regardless of your holding period after distribution. Only the cost basis is taxed as ordinary income in the distribution year.³

You can elect to include the NUA in current taxable income, which folds its ordinary income portion into the Part II averaging calculation. Form 4972 includes an NUA Worksheet to split the ordinary and capital gain components.¹ For most taxpayers with substantial NUA, deferring the tax and paying long-term capital gains on sale is the better outcome.

Should You Actually File It?

The IRS describes the Form 4972 formulas as calculations that “may result in a smaller tax than if you reported the taxable amount of the distribution as ordinary income.”¹ It doesn’t always win.

Averaging helps most when the distribution is large and your other income already fills higher brackets, because Form 4972 taxes the distribution in isolation from your salary or other income. It can hurt when the distribution is small and your other income is low, because the 1986 single-filer schedule starts at 11%, higher than the current 10% bottom bracket. For very large distributions, the 1986 top rate of 50% exceeds the current 37% ceiling.⁵

The election is one-time and voluntary. Run the distribution both ways before filing: once through Form 4972 and once as ordinary income on your return. File whichever produces the lower total. Choosing ordinary treatment preserves the one-time election for a future lump-sum distribution from a different employer’s plan.

1
Internal Revenue Service. Form 4972, Tax on Lump-Sum Distributions
2
Internal Revenue Service. Topic No. 412, Lump-Sum Distributions
3
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
4
Internal Revenue Service. Instructions for Forms 1099-R and 5498
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill