Income in Respect of a Decedent

From Bogleheads

The Internal Revenue Service defines Income in Respect of a Decedent (IRD) as follows:

All income the decedent would have received had death not occurred that was not properly includible on the final return is income in respect of a decedent. Income in respect of a decedent must be included in the income of one of the following:

• The decedent's estate, if the estate receives it;
• The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it; or
• Any person to whom the estate properly distributes the right to receive it.

Some common types of IRD include:

• Wages and vacation time paid after death:
• Partnership and Subchapter S Corp income paid after death;
• Installment agreements;
• Interest and dividends earned, but not received, before death;
• Qualified Retirement Plans (401(k), 403-b, 457-b, SIMPLE IRA, SEP, Keough etc;)
• Traditional IRAs;
• Non-qualified distributions from a Roth IRA;
• The taxable portions of annuities;
• US Savings Bonds;
• Net Unrealized Appreciation - NUA.

The character of the income you receive in respect of a decedent is the same as it would be to the decedent if he or she were alive. Thus, retirement plan distributions are taxed to the beneficiary as taxable income; Net Unrealized Appreciation as a capital gain. IRD does not receive stepped up valuation upon the death of the individual. Should a decedent's estate pay estate tax the portion of the tax attributable to the estate's IRD is deductible as a miscellaneous itemized deduction (not subject to the 2% AGI exclusion) to the beneficiary receiving the IRD. The deduction is figured by computing the estate tax due on the entire estate and computing the estate tax due on the estate minus all IRD. The difference between the two provides the deductible amount. The deduction is realized on the IRD as the IRD is paid out to the beneficiary. Thus, a beneficiary taking lifetime required minimum distributions from an inherited IRA would deduct the IRD deduction over the same lifetime schedule.^[1]

See also

• Inheriting an IRA - federal estate tax deduction
• Net Unrealized Appreciation

References

1. ↑ IRS Publication 559 Survivors, Executors, and Administrators 2007

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