Income In Respect Of A Decedent - Calculation for IRD Deduction
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