Income in respect of a decedent

What it means

Most of what an estate holds gets a step-up in basis: the gain that built up during the person's lifetime is never taxed. Income in respect of a decedent — IRD — is the exception, and it is a large one.

It covers anything the person had a right to but had not yet been paid: the final pay check and unused holiday, a bonus, accrued interest, a partnership distribution, a lawsuit settlement, and above all the untaxed balance of a traditional retirement account or an annuity.

That income keeps its character. It is taxed to whoever receives it — the estate or the beneficiary — as ordinary income, at their rate, in the year they receive it, and it does not get a step-up. A beneficiary who inherits a large traditional IRA has inherited a tax bill alongside it.

Where the estate also paid federal estate tax on the same item, the recipient may deduct their share of that tax against the income, which prevents the item being taxed twice. That deduction is frequently missed because it belongs to the beneficiary's return rather than the estate's.

Why it matters

It is why two inheritances of the same size can be worth materially different amounts after tax.

It also decides timing. Receiving a large IRD item in one year can push a beneficiary into a higher bracket, and spreading it is sometimes possible if it is planned before the money is taken.

When you are likely to meet it

• When a final pay check or an unpaid bonus arrives after the death.
• When a traditional retirement account passes to a beneficiary.
• When an accountant separates what goes on the final return from what goes on the estate's.

Related terms

• Estate taxA tax on the value of what somebody left, paid by the estate before anything is distributed.
• Fiduciary returnThe income tax return an estate or trust files for money it earns after the death.
• Final income tax returnThe last income tax return in the person's own name, covering the part of the year they were alive.
• Inherited IRAA retirement account received from somebody who died, held under rules that differ from an account you opened yourself.
• Required minimum distributionThe amount that has to be taken out of a retirement account each year once the rules require withdrawals to begin.
• Step-up in basisThe tax rule that resets an inherited asset's value to what it was worth on the date of death.

Official sources

The authority this page describes, at the agency that publishes it. Sahvelo does not restate a rule from a secondary source.

• IRS — information for a deceased person (opens in a new tab)

Sahvelo guidance that uses this

• Taxes after a death