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Limits to 10-year averaging break

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in Small Business Tax,Small Business Tax Deduction Strategies

Q. If I take a payout from my 401(k), do I qualify for 10-year averaging? M.B., Menlo Park, Calif.

A. Probably not. This “ancient” tax break is only available to someone who was born before Jan. 2, 1936, and receives a lump-sum distribution from a qualified plan. Should you qualify, you’re taxed as if you received the money over a 10-year period instead of one year, thereby reducing the overall tax. Amounts attributable to pre-1974 participation are treated as a capital gain and taxed at a flat 20% rate.

Tip: This is a complex procedure; use Form 4972, Tax on Lump-Sum Distributions, to figure the tax.

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