What Is Income in Respect of a Decedent?
One of the tasks required after a person’s death is to pay taxes on their entire estate and often for the last year of their life. Most people know this, but not everyone knows taxes are also due on any income received after a person has died. Known as “Income In Respect Of A Decedent” or “IRD,” this kind of income has its own tax rules and they may be complex, says Yahoo! Finance in a recent article simply titled “Income in Respect of a Decedent (IRD).”
Income in respect of a decedent is any income received after a person has died but not included in their final tax return. When the executor begins working on a decedent’s personal finances, things could become challenging, especially if the person owned a business, had many bank and investment accounts, or if they were unorganized.
What kinds of funds are considered Income in Respect of a Decedent?
- Uncollected salary, wages, bonuses, commissions and vacation or sick pay.
- Stock options exercised
- Taxable distributions from retirement accounts
- Distributions from deferred compensation
- Bank account interest
- Dividends and capital gains from investments
- Accounts receivable paid to a small business owned by the decedent (cash basis only)
As a side note, this should serve as a reminder of how important it is to create and update a detailed list of financial accounts, investments and income streams for executors to work with to prevent possible losses.
How is Income in Respect of a Decedent taxed? IRD is income that would have been included in the decedent’s tax returns, if they were still living but wasn’t included in the final tax return. Where the IRD is reported depends upon who receives the income. If it is paid to the estate, it needs to be included on the fiduciary return, that is Form 1041. However, if Income in Respect of a Decedent is paid directly to a beneficiary, then the beneficiary needs to include it in their own tax return. This income will be reported to the beneficiary though Schedule K-1 to Form 1041.
If estate taxes are paid on the IRD, tax law does allow for an income tax deduction for estate taxes paid on the income. If the executor or beneficiaries missed the IRD, an estate planning attorney may be able to help amend tax returns to claim it.
Retirement accounts are also impacted by Income in Respect of a Decedent. Required Minimum Distributions (RMDs) must be taken from IRA, 401(k) and similar accounts as owners age. The RMDs for the year a person passes are also included in their estate. The combination of estate taxes and income taxes on taxable retirement accounts can reduce the size of the estate, and therefore, inheritances. Tax law allows for the deduction of estate taxes related to amounts reported as Income in Respect of a Decedent to reduce the impact of this “double taxation.”
Some estate planning attorneys understand taxes, and some don’t. Even though I don’t typically prepare tax returns anymore, it’s great for me to be in a position to provide tax consulting to my clients regarding these end-of-life tax issues.
To learn more about taxes in the context of end-of-life, read these articles: Do You Pay Tax when You Sell Inherited Property? and Who Pays the Tax on a Special Needs Trust? and Taxes Due When Children Inherit A Home and Charitable Contributions to Reduce Taxes
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about how taxes may impact your estate planning.
Reference: Yahoo! Finance (Oct. 6, 2021) “Income in Respect of a Decedent (IRD)”