Income in Respect of a Decedent (IRD): Definition and Taxes

What Is Income in Respect of a Decedent?

Income in respect of a decedent (IRD) refers to untaxed income that a decedent had earned or had a right to receive during their lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income.

However, IRD also counts toward the decedent’s estate for federal estate tax purposes, potentially drawing a double tax hit. Fortunately, the beneficiary may be able to take a tax deduction from the estate tax paid on IRD. The beneficiary must declare IRD as income for the year in which they received it.

Understanding IRD

IRD is defined in Internal Revenue Code, section 691. Sources of income include the following:

• Uncollected salaries
• Wages
• Bonuses
• Commissions
• Vacation pay
• Sick pay
• Uncollected rent
• Retirement income

Other sources are:

• Payments for crops
• Interest and dividends accrued
• Distributions from certain deferred compensation and stock option plans
• Accounts receivable of a sole proprietor
• Gains from the sale of property (if the sale is deemed to occur before death, but proceeds are not collected until after death) 

How IRD Is Taxed

IRD is taxed in the same way it would have been taxed upon the decedent if they were still alive. For example, capital gains are taxed as capital gains, and uncollected compensation is taxed as ordinary income on the beneficiary’s tax return for the year they received it. There is no step-up in basis for IRDs.

How IRD Works for IRAs and 401(k)s 

Other common examples of IRD are distributions from tax-deferred qualified retirement plans such as 401(k)s and traditional individual retirement accounts (IRAs) that are passed on to the account holder’s beneficiary. If an individual dies leaving behind a $1 million IRA to his beneficiary, the beneficiary will be responsible for paying taxes on any distributions made from the account.

The beneficiary may have to start taking required minimum distributions (RMD)s at a certain point. A living spouse who is the sole beneficiary has certain rights not granted to another type of beneficiary. For example, a spouse can rollover the decedent’s IRA assets into their own IRA and postpone RMDs until age 73. Either way, each beneficiary has specific RMD rules to follow and is liable for applicable taxes. 

The age for RMDs used to be 70½, but as a result of the passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in December 2019, it was raised to 72. Then, in December 2022, the passage of the SECURE 2.0 Act raised the age to 73.

If the decedent died on or after reaching the age of RMDs, their RMD for the year of death will factor into their estate. If this were to push the decedent’s estate beyond the federal exclusion ($12.06 million in 2022 and $12.92 million in 2023), an estate tax will kick in. 

To try to minimize this impact, individuals and married couples devise estate-planning strategies that involve transferring assets to trusts. One option is a credit shelter trust, which postpones estate taxes until the death of the surviving spouse.  

The Bottom Line

IRD is income that is owed to an individual who dies before receiving it. If a beneficiary receives this money, they will owe taxes on it.

If the IRD generates a tax liability for the decedent's estate, a beneficiary may be able to claim a deduction for estate taxes connected to the IRD amount.