What is Income In Respect Of A Decedent - IRD
Income in Respect of a Decedent (IRD) refers to untaxed income which a decedent had earned or had a right to receive during his or her lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income. IRD also counts toward the decedent's estate for federal estate tax purposes, potentially drawing a double-tax hit. However, the beneficiary may be able to take a tax deduction from estate tax paid on IRD.
The beneficiary must declare IRD as income for the year in which the person received it.
BREAKING DOWN Income In Respect Of A Decedent - IRD
Income in Respect of a Decedent is defined in I.R.C. section 691.
Examples include uncollected salaries, wages, bonuses, commissions, vacation pay, and sick pay; uncollected rent; interest and dividends accrued; distributions from certain deferred compensation and stock option plans; accounts receivable of a sole proprietor; and gain from the sale of property if the sale is deemed to occur before death, but proceeds are not collected until after death.
IRD will be taxed as if they were taxed upon the decedent if he or she were still alive. For example, capital gains would be taxed as capital gains and uncollected compensation would be taxed as ordinary income on the recipient's tax return for the year he or she received it.
There is no step-up basis for IRDs.
IRD as it Relates to IRAs and 401(k)s
Other common examples of IRDs are distributions from tax-deferred qualified retirement plans such as 401(k)s and traditional Individual Retirement Accounts (IRA) that are passed onto the account holder's beneficiary. If an individual dies leaving behind a $1 million IRA to his beneficiary son, the inheritor will be responsible for paying taxes on any distributions made from the account.
The beneficiary usually would 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 roll over the decedent's IRA assets into his or her own IRA and postpone RMDs until age 70.5. Either way, each beneficiary has specific RMD rules to follow and would be liable for applicable taxes.
If the decedent died on or after reaching age 70.5, his RMD for the year of death will factor into his or her estate. If this were to push the decedent's estate beyond the federal exemption (roughly $10 million in 2018), an estate tax of 40% will kick in.
To try to minimize this impact, several individuals and married couples devise estate-planning strategies that involve transferring assets to trusts such as a credit shelter trust, which postpones estate taxes until death of the surviving spouse.