20 Income in Respect of a Decedent (IRD)

Question 1

IRD Definition

Answer 1

Income earned and entitled but not yet received before death

Question 2

Income Tax Treatment of IRD

Answer 2

Income Tax! 1040 or 1041

Question 3

Examples of IRD

Answer 3

1. Distributions from a qualified plan or IRA made after the DOD—the beneficiary receiving the distribution must report the taxable portion of the distribution as taxable income
2. Forgiveness of debt at death of an installment note—the entire amount of any remaining unrecognized gain will be IRD to the estate
3. Salary earned by the decedent that is paid after the DOD—the party receiving the salary has IRD in the year of receipt
4. Rental income and interest income accrued but unpaid at death
5. Annuity payments received after death

Question 4

IRD Income Tax Ramifications

Answer 4

1. IRD included in gross income of the recipient of the IRD. Typically, the recipient is the decedent’s estate or a beneficiary of the estate.
2. The character of the IRD income (e.g., ordinary or capital gain) is the same to the recipient as it would have been if received by the decedent. For example, a distribution from a traditional IRA received by the decedent’s beneficiary will be taxed as ordinary income to the beneficiary.
3. Whoever receives the IRD is entitled to any deductions associated with the IRD.
4. The decedent’s basis in the IRD asset carries over to the new owner of the assets and is not eligible for step-up.

Question 5

Estate Tax Ramifications of IRD

Answer 5

IRD treated as assets in the GE

Question 6

Income Tax Deduction for IRD Estate Tax

Answer 6

1. Determine estate tax attributable to IRD
2. Calculate the deduction on the basis of the recipient’s proportionate amount of IRD (IRD/GE * Estate tax)
3. Deduction available on 1041 or from form K-1 on 1041
4. If recipient is an individual Misc. Itemized Deduction NOT SUBJECT to 2% AGI floor