| Estate & Gift Tax / Income in Respect of a Decedent (IRD) |  |
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What is IRD? IRD is income which the
decedent (the person from whom you inherit the property) would have
taken into his income on his final income tax return except that death
interceded. The most common IRD item is the decedent's last paycheck,
received after death. It would have normally been included in the
decedent's income on his final income tax return. However, since the
decedent's tax year closed as of the date of death, it was not included.
As an item of IRD, it is taxed as income to whomever does receive it
(the estate or another individual). Not just the final paycheck, but any
compensation-related benefits paid after death such as accrued vacation
pay or voluntary employer benefit payments, will be IRD to the
recipient. Other common IRD items include
pension benefits and amounts in a decedent's individual retirement
accounts (IRAs) at death as well as a decedent's share of partnership
income up to the date of death. If you receive these IRD items, they are
included in your income. The IRD deduction.
Although IRD must be included in the income of the recipient, a
deduction may come along with it. The deduction is allowed (as an
itemized deduction) to lessen the 'double tax' impact that is caused by
having the IRD items subject to the decedent's estate tax as well as the
recipient's income tax. To calculate the IRD deduction, the
decedent's executor may have to be contacted for information. The
deduction is determined as follows: First, you must take the 'net value'
of all IRD items included in the decedent's estate. The net value is the
total value of the IRD items in the estate, reduced by any deductions in
respect of the decedent. These are items which are the converse of IRD:
items the decedent would have deducted on his final income tax return
but for death's intervening. Next you determine how much of the federal
estate tax was due to this net IRD by seeing what the estate tax bill
would have been without it. Your deduction is then the percentage of the
tax that your portion of the IRD items represents. Example: At Mort's death, $50,000 of IRD items were included in his gross estate, $10,000 of which were paid to Sally (20%). There were also $3,000 of deductions in respect of a decedent, for a net value of IRD items of $47,000. Had the estate been $47,000 less, the estate tax bill would have been $19,270 less. Sally will include in her income the $10,000 of IRD she receives. If she itemizes deductions, she may also deduct $3,854, which is 20% (10,000/50,000) of $19,270. |
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