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How much qualifies for capital gain rate?

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in Small Business Tax

To figure what portion of a lump-sum distribution qualifies for the capital gains break, multiply the taxable amount by this amount: The number of months of pre-1974 plan participation divided by the total number of months of plan participation. (Any portion of a calendar year before 1974 counts as a full 12 months. Any part of a month of participation after 1973 counts as one full month.)

Example: Let’s say you’re entitled to a $500,000 payout from your company retirement plan. You began participating in the plan on Dec. 31, 1970, and terminated your employment on May 1, 1995. Thus, you have 48 months (four full years) of pre-1974 participation and 257 months (21 years and five months) of post-1973 participation.

On those facts, the capital gain portion of the distribution is $78,689 ($500,000 times 48 months divided by 305 total months). The remaining ordinary income portion is $421,311 ($500,000 times 257 months divided by 305 total months).

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