unpaid salary and bonuses
Income in respect of a decedent is income earned by a decedent or income to which the decedent had a right prior to death, but which was not properly includible in the decedent's gross income prior to death. Examples include such items as:
unpaid salary and bonuses
deferred compensation benefits
accrued interest and rent
accounts receivable
unpaid fees and commissions
uncollected proceeds of a sale made before death
uncollected payments on an installment note
survivor benefits under a joint-and-survivor annuity
gain on deferred annuities
death benefits from retirement plans, IRAs, and annuities
IRD is generally includible in the gross income of the recipient. This may be the decedent's estate or an individual who acquires the right to receive the income directly from the decedent. It does not matter whether the property passes through the probate estate or outright to the recipient. While the income retains the same character it would have had in the decedent's hands, it is taxable at the recipient's income tax rate.
If the income in respect of a decedent represents gain (capital or ordinary) on the sale of an asset, the recipient may utilize the decedent's basis to offset the gain. The basis of appreciated property does not step up to the fair market value at death, even though the income in respect of a decedent is included in the gross estate.
IRD is includible in the decedent's gross estate as a property interest or right that passes at death.
Income in respect of a decedent is taxed twice: once for federal estate tax purposes and again to the recipient for federal income tax purposes. If the estate was the recipient, and was in a 40% estate tax bracket and a 39.6% income tax bracket, about 80% of the property would be lost to the combined taxes.
To prevent this double taxation, the IRS allows a special income tax deduction for IRD. Remember, the full amount of income is taken into gross income as received, but the recipient is then allowed to deduct the federal estate tax paid by the estate that was attributable to the IRD.
If there are two or more items of income in respect of a decedent in the gross estate, life gets more complicated. The total amount of estate tax attributable to these items must be apportioned among the individual items as follows:
Total estate tax attributable to all IRD items x Value of each IRD item ÷ Value of all IRD items
This deduction then follows each item of income in respect of a decedent into the hands of the appropriate recipient.
The deduction for estate tax attributable to IRD is a "miscellaneous" itemized deduction, but it is not subject to the usual 2%-of-adjusted-gross-income floor on such deductions. However, it is possible that the reduction in itemized deductions imposed on certain higher-AGI taxpayers would reduce the IRD deduction.
Note that the deduction for estate tax attributable to income in respect of a decedent is taken by the IRD recipient only as the income is received and in the same proportion. For instance, if $5,000 of estate tax is attributable to an installment promissory note that has five remaining payments of $4,000 each, the deduction must be taken by the IRD recipient in equal proportion, or $1,000 per payment.
If the income in respect of a decedent passes to the surviving spouse as part of the marital deduction share of the estate, it does not generate any federal estate tax. Thus, there will be no estate tax attributable to the IRD, and no income tax deduction available for the surviving spouse. Leaving IRD to the surviving spouse may still be preferable to leaving it to other beneficiaries, however, where it would be depleted by federal estate taxes with only a partial income tax offset.
It is important to note that to the extent the surviving spouse does not use up the IRD assets, they will be subject to income and estate taxes in the spouse's estate.
Graphic: How Income in Respect of a Decedent Works
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Click here for an example of how income in respect of a decedent is included in the gross estate.