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
Related Articles
  1. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  2. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  3. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  4. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  5. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  6. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  7. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  8. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  9. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
  10. Investing Basics

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center