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. Retirement

    Tax-Saving Advice for IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  2. Taxes

    An Overview of Itemized Deductions

    President Trump may get rid itemized deductions.
  3. 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.
  4. Taxes

    Want A Bigger Tax Refund? Don't Itemize

    Six reasons why many taxpayers can save money and time by claiming the standard deduction.
  5. 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.
  6. 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.
  7. 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.
  8. Taxes

    How Much Will You Owe on Your Inheritance?

    Estate planning can be unpleasant, but in order to get the full benefit of what you've inherited, it’s important to be prepared for the related taxes.
  9. 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.
Frequently Asked Questions
  1. Is There a Difference Between the Equity Market and the Stock Market?

    Equities and stocks refer to the same thing.
  2. What Happens to a Company's Stock When it Goes Bankrupt?

    Shareholders may be entitled to a portion of the liquidated assets in the wake of a bankrutpcy, but the stock will be worthless.
  3. What are Advantages and Disadvantages of Preference Shares?

    Preference shares have advantages and disadvantages for both investors and issuing companies.
  4. When am I eligible to receive Social Security benefits?

    Understand when you are eligible to begin collecting Social Security retirement benefits and how retiring at different ages ...
Trading Center