October 2009

Income in Respect of a Decedent (IRD)
By Mark L. Schroeder, CPA

        When an individual dies, the death closes his or her current tax year. A tax return must be filed by the decedent's executor, administrator, or spouse, covering the part of the year before the date of death. The computation of the tax in the decedent's final return follows the accounting method used during life. Similar rules apply to deductions.

        However, not all income the decedent had earned may have been received prior to death. Special tax rules are applicable to several items of income the decedent earned and would have received if he or she would have lived. These items are taxed to the recipient in the year of receipt. These sums of income are termed “income in respect of a decedent,” or “IRD”. Generally, inherited property is not included as income to the recipient for tax purposes but these IRD income items do have to be included on the recipient’s tax return. Some common IRD items are the value at decedent’s death of pension benefits, individual retirement accounts (IRAs), taxable portion of annuity contracts, accrued interest income on Government Bonds such as E and I Bonds and the gross profit portion of installment notes not collected before death.

        Although IRD items must be included in the income of the recipient, a deduction may come along with it. The deduction is allowed (as an itemized deduction) to lessen the “double tax” impact that is caused by having the IRD items subject to the decedent's estate tax as well as the recipient's income tax.

        There are various calculations that need to be completed to compute the IRD deduction; and the decedent's executor may have to be contacted to gather information needed from the estate to calculate the deduction. In general terms, the deduction is determined as follows: First, you must take the “net value” of all IRD items included in the decedent's estate, and then you determine how much of the federal estate tax was attributable to this “net value” of all IRD items by calculating what the estate tax bill would have been without them and comparing it to the actual federal estate tax paid. Your deduction is then the percentage of the additional tax that your portion of the IRD items for the year represents compared to total IRD items in the estate.

        Please contact our office if we can be of assistance to you with regards to Income in Respect of a Decedent (IRD) or the IRD deduction referred to above.