Income in respect of a decedent (IRD) is the gross income a deceased individual would have received had he or she not died and that has not been included on the deceased individual’s final income tax return. If, like most people, the deceased individual was a cash basis taxpayer, IRD is income that the decedent earned but did not receive prior to death. IRD is reported on the recipient’s income tax return in the year received. If IRD is paid to the decedent’s estate, it is reported on the fiduciary return. If IRD is paid directly to a beneficiary, it is reported on the beneficiary’s tax return.
Examples of IRD
IRD may include:
- The uncollected salaries, wages, bonuses, commissions, vacation pay, and sick pay of a cash basis employee;
- Distributions from certain deferred compensation and stock option plans;
- Taxable distributions from employer-sponsored retirement plans, including pension plans, profit-sharing plans, simplified employee pension plans (SEPs), and Keoghs;
- Taxable distributions from individual retirement accounts (IRAs);
- Accounts receivable of a cash basis sole proprietor;
- Interest and dividends accrued but unpaid at death of a cash basis taxpayer;
- Gain from the sale of property if the sale is deemed to occur before death, but proceeds are not collected until after death;
- Difference between the face amount and the decedent’s basis in an installment sales obligation;
- Distributive share of partnership items for the period before death for a partnership tax year that ends after death, unless the death causes the partner’s tax year to close, and
- Death benefits received under a deferred annuity contract that are in excess of the owner-annuitant’s investment in the annuity (if the owner-annuitant dies before the annuity start date).
Income tax deduction for estate taxes paid
IRD is included in the decedent’s gross estate on Form 706 and may be subject to estate tax. As previously mentioned, income tax is also due on IRD when received by the estate or beneficiary. If estate tax is paid on IRD, however, an income tax deduction is allowed for the federal estate tax paid on the income.
Example: Horatio’s traditional IRA is valued at $200,000 at his death and consists entirely of deductible contributions. The $200,000 value of the IRA is included in his gross estate and subject to estate tax. With his other assets, Horatio’s taxable estate exceeds the federal death tax exclusion amount. Horatio’s daughter Guinevere is the designated beneficiary of his IRA and receives the IRA funds after his death. Distributions of the funds from Horatio’s IRA are treated as income in respect of a decedent. Guinevere must report this income on her federal income tax return. Guinevere is allowed an income tax deduction for the estate taxes attributable to the IRA.
If you have questions regarding estate taxes and income a decedent’s estate receives, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
