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

    Trump's Paradox: Real Estate CEOs Brace for Change

    Real estate industry executives are expressing fears over Trump carrying out radical tax reform.
  2. Taxes

    An Overview of Itemized Deductions

    Itemized deductions will mostly stay the same for 2017 tax year (medical deductions improve under the new tax bill). Big changes start in 2018.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Taxes

    Tax Deductions For Rental Property Owners

    The IRS defines a real estate professional as someone who works more than half of her time in the business, and more than 750 hours per year working on her properties.
  8. Tech

    Top Tax Tips to Deduct Investment Management Fees

    Investment expenses can be deducted by those who meet three main criteria. Here's what they are and how they work.
  9. Taxes

    Increase Your Tax Refund With Above-The-Line Deductions

    Find out about these deductions and how you can use them to lower your tax bill.
Frequently Asked Questions
  1. What is a good annual return for a mutual fund?

    Learn the key factors that determine if a mutual fund's return is "good" for you and your needs?
  2. How are industrial goods different from consumer goods?

    Understand the difference between industrial goods and consumer goods, and learn the different types of industrial goods ...
  3. What causes inflation, and does anyone gain from it?

    In this article, we will examine the fundamental factors behind inflation, different types of inflation and who benefits ...
  4. What is the difference between a buy-side analyst and a sell-side analyst?

    The main difference between a buy-side analyst and sell-side analyst is the type of firm that employs them and the people ...
Trading Center