What Is Income In Respect To Decedent (IRD) Estate Tax Deduction?

Income In Respect To Decedent (IRD) Defined

Income in respect of a decedent (IRD) is income earned by the decedent (deceased person) prior to his death but was payable or paid after his death. Income in Respect to Decedent includes the taxable portions of annuities, traditional IRAs and tax deferred retirement plans, Series EE U.S. Savings Bonds, installment agreements, partnership income, rent, wages, bonuses and vacation time paid after death. It also includes interest and dividends earned on stocks, bonds or mutual funds in the decedent’s name while he was alive, but paid after his death.

How is IRD Reported

Often you will have to add the item to the final 1040 federal tax return of the decedent because the social security number on the tax document such as a W-2, 1099 or K-1 will be the decedent’s. Once the estate is probated the executor can retitle the retirement plans, EE U.S. Savings Bonds or other asset to the estate or beneficiaries name and tax identification number so it can be included on the return of the person or entity receiving the income.

If no beneficiary is named such as the surviving spouse, it passes to the estate, and passes by will. If the decedent did not have a will it passes by intestate law.

How Is IRD Taxed

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 because the income was never taxed during the decedent’s life.

The IRD Estate Tax Deduction

One of the most missed deductions available to recipients of IRD is the federal estate tax deduction attributable to the IRD items. Since the amount was earned while the decedent was alive and owed to the decedent at the date of death, it is an asset of the estate. If the estate owes federal estate tax, 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 on their respective federal 1040 tax return in the year received. Thus items of IRD are potentially taxed twice, once on the federal 706 Estate Tax return and again on the recipient’s federal 1040 tax return.

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 which includes the IRD items. This difference is the estate tax due to the IRD items. A proportionate amount of this may be deducted on the recipient’s 1040 federal tax return, by the recipient as they realize the income from the IRD item. For example, someone collecting from a deceased person’s 401(k) or traditional IRA would have a deduction of the federal estate tax on that portion of the decedent’s assets, recovered over time in the year the income was received.

If you have any questions about IRD feel free to call Gregory J. Spadea at Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

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