What is Income for a Deceased Person?

If someone died, they may have made or been entitled to income that has not been taxed. This is called income in respect of a decedent (IRD). The person or business that gets this income is taxed on the IRD.

But IRD is also part of the estate for federal estate tax reasons, so the person may have to pay two taxes. The beneficiary may be able to offset the estate tax paid on IRD, which is good news. The person who got the IRD must report it as income for the year it was given to them.

How to Understand IRD

Section 691 of the Internal Revenue Code explains what IRD is. The following are sources of income:

• Not yet paid salaries
• How much money
• Added Value
• Payment Plans
• Holiday pay
• Pay for being sick
• Rent not paid
• Money for retirement
• Here are some other sources:
• Giving money for crops
• Dividends and interest grew over time.
• Some deferred pay and stock option plans are giving out money.
• Payments due from a sole owner
• Gains from the sale of property (if the sale is thought to have happened before death but the money isn’t received until after death)
• Any due money from an IRA or sales commissions at death is also subject to IRD.

How to Pay Tax on IRD

If the dead person were still alive, IRD would have been taxed similarly. In this case, capital gains are taxed as capital gains, and uncollected compensation is taxed as ordinary income on the tax return of the person who got it. Based on IRDs, there is no step-up.

How Income in Respect of a Decedent Works for 401(k)s and IRAs

Giving money to someone else from a qualified retirement plan, like a 401(k) or a standard individual retirement account (IRA), without paying taxes is another typical example of IRD. If someone dies and leaves a $1 million IRA to a beneficiary, that recipient must pay taxes on any money from the account.

Someone supposed to get the money may have to start taking the required minimum payments (RMDs) at some point. Someone who is the only beneficiary and is still alive has rights that no other type of recipient has. One partner can move the assets from a deceased spouse’s IRA to their own IRA and wait to take out RMDs until they turn 73. In either case, each recipient must follow their own RMD rules and pay any due taxes.

The old age for RMDs was 70½, but in December 2019, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was signed into law, which raised the age to 72. The age was then raised to 73 when the SECURE 2.0 Act was signed into law in December 2022.

If the person died before or after the RMD age, their RMD for the year they died will be added to their estate. If this makes the estate of the person who died bigger than the federal exclusion ($12.06 million in 2022 and $12.92 million in 2023), there will be an inheritance tax.

To lessen this effect, people and married couples plan their estates by moving assets to trusts. With a credit shelter trust, for example, estate taxes are put off until the surviving partner’s death.

How do I tell Income in Respect of a Decedent about it?

Any money you get from this must be reported on your personal income tax return for the year you got it.

What’s the Difference Between IRD and Coming Into Your Own?

When someone dies and leaves your property, that’s called an inheritance. Some people owe money to someone who has died, but they never get it. This is called income in respect of a decedent, or IRD. That money could instead go to the winner. In this case, you will get the minimum distribution from an IRA that was supposed to be given to the person who died the year they died. Most of the time, you don’t have to pay taxes on inheritance, but if you get IRD, you will.

How is that person taxed when he gets income in respect of a decedent?

The same way the person who died would have been. An RMD from a traditional IRA, for example, would have been treated as regular income by the person who died. The person who gets the RMD will report it similarly and pay tax based on their income tax rate.

Conclusion

• If someone died, they may have made or been entitled to receive income that has not been taxed. This is called income in respect of a decedent (IRD).
• IRD is charged as if the person who died were still alive.
• Most of the time, beneficiaries are the ones who have to pay taxes on IRD income.