Calculation for IRD Deduction
If a person has to include IRD in their gross income and an estate tax return (Form 706) was filed for the decedent, they may be able to claim a deduction for the estate tax or goods and services tax (GST) paid on that income. This is because the income that the decedent had a right to receive was included in the gross estate and was subject to estate tax.

The deduction goes to the person who receives the IRD, not the person who paid the estate tax. Individuals can claim this deduction only as an itemized deduction on line 28 of Schedule A (Form 1040). This deduction is not subject to the 2% limit on miscellaneous itemized deductions, and therefore this deduction is also allowed in computing the Alternative Minimum Tax (AMT). Estates can claim the deduction on the line provided for the deduction on Form 1040.

To determine the amount of the deduction, you must:


Step 1: Calculate the estate tax due on the entire estate.

Step 2: Calculate the net value of all items of IRD that were includible in the estate.

Step 3: The estate tax attributable to the IRD is the difference between the actual federal estate tax due on the estate, and the federal estate tax that would have been due had the net value of the IRD been excluded from the estate.


Example: Wayne dies in 1999 with a taxable estate of $2 million (which includes a $1 million pension plan) and leaves it to his son Jerry. The federal estate tax on a $2 million taxable estate after deducting the unified credit is $469,900. If the $1 million IRA were excluded from the taxable estate, the taxable estate would be only $1 million, and the federal estate tax owed would be $101,300. Therefore, the amount of federal estate tax attributable to the IRA is $368,600 ($469,900 - $101,300). Jerry will be entitled to an income tax deduction of $368,600 which he can deduct when he receives the $1 million pension distributions.

Also, keep in mind the deduction is allowed only for the years in which the recipient reports the IRD income, and that no deduction is allowed for state death taxes paid on the IRD (only federal death taxes paid).

Income Tax Treatment

Related Articles
  1. Taxes

    An Overview of Itemized Deductions

    President Trump may get rid itemized deductions.
  2. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  3. Taxes

    Want A Bigger Tax Refund? Don't Itemize

    Six reasons why many taxpayers can save money and time by claiming the standard deduction.
  4. Financial Advisor

    How Estate Taxes Work, A Real Life Example

    The estate tax is frequently misunderstood. Learn more details about exactly how estate, or inheritance, taxes work in the United States.
  5. Taxes

    Estate Taxes: Who's on the Hook?

    Inheritance taxes can be tricky. Most people have to deal with them at a very inconvenient time. It's better to learn the laws now so you're ready later.
  6. Financial Advisor

    How Life Insurance Can Help Reduce Estate Taxes

    Inheritance is a double-edged sword, as leaving money can create estate tax burdens. Opting for a life insurance plan can help mitigate those burdens.
  7. Taxes

    Do Your Research Before Claiming These Deductions

    Be sure to read the fine print about any deduction or credit that you’re planning to claim.
  8. Taxes

    8 States With Estate Taxes

    Understand the difference between the federal estate tax and state-specific estate taxes. Learn about some of the worst states with estate taxes.
  9. Taxes

    Calculating the Mortgage Interest Tax Deduction

    The amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
Frequently Asked Questions
  1. What is the history of the S&P 500?

    Discover the history of the S&P 500, which sophisticated market participants consider to be the best index to understand ...
  2. Did the repeal of the Glass-Steagall Act contribute to the 2008 financial crisis?

    Understand the argument that the repeal of the Glass-Steagall Act caused the 2008 financial crisis, and learn why the argument ...
  3. Why do MBS (mortgage-backed securities) still exist if they created so much trouble in 2008?

    Read several different arguments in favor of allowing the trade of mortgage-backed securities, even after the financial crisis ...
  4. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
Trading Center