When a taxpayer dies, there may be items of income that the decedent was entitled to receive as of the date of his or her death but that are not properly includible in the decedent’s final income tax return because of the decedent’s method of accounting. These items of income are known as income in respect of a decedent (IRD). Generally, if the decedent was a cash-method taxpayer, all accrued income of the decedent at the time of his or her death is IRD. If the decedent was an accrual-method taxpayer, income accrued solely by reason of death is IRD. Whether the decedent was a cash-method or accrual-method taxpayer, income to which the decedent had a contingent claim at the time of his death is IRD.
A common example of IRD is wages that a cash method taxpayer had earned, but had not yet received, as of the date of his or her death. Since a taxpayer’s final income tax return covers only the period up to the date of his or her death, and since a cash-method taxpayer does not include income in his or her income tax return until the year in which he or she receives it, such wages are not includible as gross income in the taxpayer’s final income tax return. The wages are instead considered IRD. IRD is subject to tax under the following rules:
(1) If the decedent’s estate has the right to receive the IRD, it must be included in the gross income of the estate.
(2) If the decedent’s estate properly distributes the right to receive the IRD to a person who has the right to receive it by bequest, devise, or inheritance, it must be included in that person’s gross income.
(3) If the right to receive the IRD passes directly to a person other than the decedent’s estate by reason of the death of the decedent, it must be included in that person’s gross income.
IRD must be included in the appropriate taxpayer’s gross income in the tax year the taxpayer receives it, regardless of the recipient’s accounting method. The character of IRD is the same in the hands of the recipient as it would have been in the hands of the decedent if he or she were alive and received it. Thus, for example, if the income from a sale of property would have been long-term capital gain in the decedent’s hands if he or she had lived and received it, then it will be treated as long-term capital gain to the recipient.
A person who is required to include IRD in gross income is allowed a deduction for the estate tax paid on that IRD. The estate tax deduction is allowed only for the same year in which the IRD must be included in gross income. The income that is treated as IRD is taxable for both estate tax purposes and income tax purposes. Thus, this rule allows a deduction on an income tax return for the tax paid on the decedent’s estate tax return.
Certain deductible expenses for which the decedent was liable on the date of his or her death, but that are not properly allowable as deductions on the decedent’s final income tax return (or a prior income tax return), can be deducted by (1) the decedent’s estate; or (2) if the decedent’s estate is not liable, by the person who acquired by bequest, devise, or inheritance or by reason of the decedent’s death an interest in the decedent’s property that is subject to the liability.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 04112021 321-135)