What Is IRD? Income in Respect of a Decedent Explained

When someone passes away, their assets and income don’t just disappear. Some forms of income that were owed but not received at the time of death must still be accounted for. This is known as Income in Respect of a Decedent (IRD) and has specific tax implications for heirs and estates.

Understanding IRD is crucial because it affects both the estate’s tax burden and what beneficiaries receive. Proper planning can help minimize taxes and ensure compliance with IRS rules.

Types of IRD Income

Certain types of income remain taxable after a person’s death and must be reported by the estate or beneficiaries. One common example is unpaid wages. If a deceased individual was owed a final paycheck, bonuses, or commissions, these amounts are considered IRD. Employers typically issue a Form 1099-MISC or W-2, depending on the payment type, and the recipient must report it accordingly.

Retirement account distributions also fall into this category. If the decedent had a traditional IRA or 401(k) and had not yet taken required minimum distributions (RMDs) for the year, the beneficiary must withdraw and report those amounts as taxable income. Traditional retirement accounts contain pre-tax contributions, making any withdrawals subject to ordinary income tax. The SECURE Act of 2019 and its 2022 update changed the rules for inherited IRAs, requiring most non-spouse beneficiaries to withdraw the full balance within 10 years, which can create significant tax liabilities.

Rental income from properties owned by the deceased is another form of IRD. If rent was earned but not yet collected before death, the estate or beneficiary must report it as income. The same applies to interest and dividends from investments. If a bondholder died before receiving an interest payment or a stockholder was due a dividend that had not yet been paid, these amounts must be included in taxable income.

How IRD Is Handled for Taxes

IRD is taxed to the person or entity that receives it, whether the estate or the beneficiary. Unlike other assets that receive a step-up in basis upon death—eliminating capital gains tax liability—IRD retains its original tax character. If the income would have been subject to ordinary income tax when received by the decedent, it remains taxable in the same manner for the recipient.

The timing of when IRD is reported depends on who collects it. If the estate receives the income before distributing it, it must report it on its fiduciary income tax return (Form 1041). Estates are subject to compressed income tax brackets, meaning higher tax rates apply at lower income levels. In 2024, an estate reaches the highest federal tax bracket of 37% at just $15,200 of taxable income, whereas an individual does not reach this rate until earning over $609,350 (for single filers). If the estate distributes the income to beneficiaries before filing its return, the tax burden shifts to the recipients, who then report it on their personal tax returns.

For beneficiaries, IRD is taxed at their ordinary income tax rates. Large amounts of IRD can push a recipient into a higher tax bracket. For instance, if a beneficiary with a taxable income of $90,000 receives an additional $50,000 in IRD, their marginal tax rate could increase from 22% to 24% or higher. Spreading withdrawals over multiple years, when possible, can help manage this impact.

Certain types of IRD also have withholding considerations. If income originates from employer compensation or annuity payments, federal and state taxes may have already been withheld before distribution. Beneficiaries should review tax documents, such as Form 1099-R for annuities or Form W-2 for deferred salary payments, to determine how much has already been paid and what remains due at tax time.

Claiming the IRD Deduction

The IRS allows beneficiaries to claim an IRD deduction to offset some of the tax liability. This deduction exists because IRD assets are often subject to both estate tax and income tax.

To calculate the deduction, a beneficiary must determine the portion of the estate tax attributable to IRD assets. This requires referencing the estate’s Form 706 (United States Estate Tax Return) and identifying how much of the taxable estate consisted of IRD. The deduction is only available if the estate was large enough to trigger federal estate tax liability, which in 2024 applies to estates exceeding $13.61 million. If no estate tax was paid, there is no IRD deduction available.

Unlike itemized deductions, the IRD deduction is taken as an “above-the-line” deduction, directly reducing taxable income. This can be particularly beneficial for high-income beneficiaries who might otherwise face deduction phaseouts. Additionally, this deduction is not a one-time claim; it can be taken incrementally over multiple years if the IRD income is received in installments rather than as a lump sum.

Estate and Beneficiary Implications

The distribution of IRD assets can create challenges for estate executors and heirs, particularly when liquidity is a concern. Unlike assets that can be sold to cover tax liabilities, IRD often consists of income streams or deferred payments, making it harder to manage immediate obligations. Executors must assess the estate’s cash flow to ensure sufficient funds are available before making distributions. If an estate lacks liquid assets, beneficiaries may need to sell inherited property or other investments to cover their tax obligations, potentially triggering additional capital gains taxes.

Trust structures can help mitigate the impact of IRD on beneficiaries. If an estate plan includes a trust, the treatment of IRD depends on how income is distributed. Complex trusts, which accumulate income rather than distributing it annually, may face higher tax rates due to compressed trust tax brackets. Passing income through to beneficiaries in a simple trust structure can result in lower overall tax liability if the recipients fall into lower individual tax brackets. Charitable remainder trusts (CRTs) can also be beneficial, as they allow IRD assets to be transferred to a tax-exempt entity while providing beneficiaries with an income stream, reducing the immediate tax burden.