Income in Respect of the Decedent (IRD): Unraveling Tax Implications and Estate Planning
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Summary:
Income in respect of a decedent (IRD) refers to untaxed income earned or owed to a decedent during their lifetime, taxable to individual beneficiaries or entities inheriting it. This article explores the taxation, sources, implications, and reporting of IRD, detailing its distinction from inheritance and its impact on beneficiaries and estates.
Understanding income in respect of a decedent (IRD)
Income in respect of a decedent (IRD) refers to untaxed income or income-related rights that a deceased person accrued during their lifetime. Taxed to individual beneficiaries or entities inheriting it, IRD impacts the decedent’s estate for federal estate tax purposes, potentially causing double taxation. Beneficiaries must report IRD as income in the year of receipt.
Sources of IRD
IRD, outlined in Internal Revenue Code Section 691, encompasses diverse income sources:
- Uncollected salaries
- Wages
- Bonuses
- Commissions
- Vacation and sick pay
- Uncollected rent
- Retirement income
Payments for crops, interest and dividends that have built up, distributions from some deferred salary and stock option plans, accounts receivable of a sole proprietor, and gains from property sales that happened before death but were realized after death are also sources. IRD also encompasses income from sales commissions and IRA distributions owed to the decedent at their death.
Taxation of IRD
IRD is taxed, mirroring the decedent’s taxation if alive. Capital gains are taxed similarly, while uncollected compensation is taxed as ordinary income on the beneficiary’s tax return for the year of reception. No step-up in basis applies to IRDs.
IRD and retirement accounts
Common IRD examples involve distributions from tax-deferred retirement plans like 401(k)s and traditional IRAs passed to beneficiaries. Beneficiaries assume tax responsibilities for distributions, with specific rules such as required minimum distributions (RMDs) and recent adjustments in RMD ages affecting tax implications.
Reporting IRD
Beneficiaries report IRD income on their personal tax returns for the year of reception.
IRD vs. inheritance
IRD differs from inheritance as it refers to income owed but not received before the decedent’s death, while inheritance involves property bequeathed to beneficiaries. Unlike inheritance, IRD income is taxable to beneficiaries.
Taxation of IRD as required minimum distribution
Beneficiaries are taxed on IRD similarly to the decedent’s taxation. For instance, the decedent would have reported and paid taxes on an RMD from a traditional IRA as regular income.
Frequently asked questions
What is IRD?
Income in Respect of a Decedent (IRD) refers to untaxed income earned or due to a decedent during their lifetime, taxed to beneficiaries or entities inheriting this income.
How is IRD taxed?
IRD is taxed similarly to how the decedent would have been taxed if alive, with beneficiaries reporting it as income for the year of reception.
What’s the difference between inheritance and IRD?
Inheritance is the property that a deceased person leaves behind, whereas IRD is income that was due to the deceased person but not received prior to death and is taxable to beneficiaries.
Key takeaways
- IRD comprises untaxed income owed to a deceased individual.
- It is taxed similarly to the decedent, impacting beneficiaries.
- Various income sources contribute to IRD.
- Tax reporting for IRD differs from inheritance.
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