Income in Respect of a Decedent - IRD
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About the Topic
Income In Respect of a Decedent is the name given to all types of taxable income earned, but not received by the decedent by the time of his or her death. IRD is NOT taxed on the final return of the decedent, instead, it goes on the return of the person or entity receiving the income. Sometimes this is the surviving spouse, sometimes the estate, sometimes some other beneficiary. Often you will have to add the item to the final 1040 of the decedent, and then nominee it off to the correct recipient, because the SSN on the document will be the decedent's.
IRD retains the same tax nature after death as it would have had if the decedent had received the item of income while alive. There is no step-up in basis for IRD items.
Common types of IRD include the taxable portions of annuities, IRAs and retirement plans, Series EE US Savings Bonds, installment agreements, wages and vacation time paid after death, interest and dividends earned, but not received, before death.
One of the most missed deductions available to recipients of IRD is the estate tax deduction attributable to the IRD items. Since the amount was earned while alive and owed to the decedent at the date of death, it is an asset of the estate. If the estate owes estate transfer tax on the Form 706, some of it is attributable to the IRD items. When the ultimate recipient receives the items of IRD, the recipient must include these in income and pay income tax. Thus items of IRD are potentially taxed twice.
The IRD estate tax deduction is calculated by re-computing the 706 without any of the items of IRD, then subtracting this number from the true federal estate transfer tax bill. This difference is the estate tax due to the IRD items. A proportionate amount of this may be deducted not subject to the 2% of AGI limit, by the recipient as they realize the income from the IRD item. Sec. 691(c) and Sec. 67(b)(7). For example, someone collecting from a deceased person's 401(k), IRA, or collecting the principal and interest on an installment note, would have a deduction of the estate tax on that portion of the decedent's assets, recovered over time as the income was received.
Similar in concept to IRD is DRD - Deductions in Respect of a Decedent. DRD Sec. 691(b) items were owed at the time of death, but not yet paid. Had they been paid by the decedent, they would have been deductible in some form (business expenses, interest expense, taxes, investment expenses, and depletion). When they are paid, either by the estate or by the person who inherits the property subject to the liability, they are deductible.
Related Code Sections
Learn more about IRD by reading Sec. 691