IRD: Income in Respect of a Decedent

Income in Respect of a Decedent (IRD) refers to income that was owed to a deceased person but not received before their death. This income is typically subject to both estate and income taxes.

Income in Respect of a Decedent (IRD) refers to income that was generated by a deceased person but was not included in their final income tax return because it was not received before their death. This type of income is taxable to the estate or the beneficiaries who inherit it. IRD can include salaries, wages, dividends, interest, and other income.

Key Characteristics of IRD

Types of IRD

• Salaries and Wages: Unpaid compensation earned before death.
• Dividends and Interest: Earnings from investments not received by the decedent.
• Retirement Accounts: Distributions from IRAs or 401(k)s not withdrawn before death.
• Rental Income: Income from leased properties not collected.
• Installment Sales: Payments from property sales made before death but received afterward.

Tax Implications

IRD is included in the gross income of the beneficiary who receives it. It is subject to both estate taxes (if the total estate exceeds the federal exemption limit) and income taxes.

• Estate Tax: The value of IRD assets is included in the decedent’s taxable estate.
• Income Tax: Beneficiaries pay taxes on the IRD they receive, at their individual tax rates.

Historical Context

The concept of IRD was established to address situations where a decedent’s income, accrued before death but received posthumously, needs to be taxed appropriately, balancing fairness between the decedent’s total tax obligations and the beneficiaries’ tax liabilities.

Applicability

IRD is relevant for executors of estates and beneficiaries who need to navigate the complexities of reporting and paying taxes on inherited income. It is critical to understand for proper estate planning and tax preparation.

Comparisons

Related Terms

• Beneficiary: An individual or entity entitled to receive benefits from a will, trust, or insurance policy.
• Decedent: A person who has died.
• Executor: The person responsible for administering the decedent’s estate.

FAQs

How is IRD reported?

IRD should be reported as taxable income by the recipient (estate or beneficiary) in the year it is received. It’s typically reported on Form 1041 for estates or on individual tax returns for beneficiaries.

Can IRD deductions be claimed?

Yes, federal estate taxes paid on the IRD can be deducted on the beneficiary’s income tax return, ensuring the estate tax and income tax on the same income are not duplicative.

Do retirement accounts count as IRD?

Yes, distributions from retirement accounts like IRAs and 401(k)s that the decedent was entitled to but did not receive before death are considered IRD.

References

1. IRS Publication 559 - Survivors, Executors, and Administrators.
2. Internal Revenue Code (IRC) Section 691 - Income in Respect of a Decedent.

Summary

Income in Respect of a Decedent (IRD) represents the taxable income generated before death but received posthumously. Complexities arise in its taxation, requiring careful handling by executors and beneficiaries to ensure compliance with federal and applicable state tax laws. Proper understanding and management of IRD aid in seamless estate administration and minimize potential tax liabilities.