Income in Respect of a Decedent (IRD): Definition and Taxes

What Is Income in Respect of a Decedent (IRD)?

Income in respect of a decedent (IRD) refers to untaxed income that a decedent had earned or had a right to receive during their lifetime. Taxes on IRD are owed by the individual beneficiary or entity that inherits this income.

However, IRD also counts toward the decedent’s estate for federal estate tax purposes, potentially drawing a double tax hit. Fortunately, the beneficiary may be able to take a tax deduction for the estate tax paid on IRD. The beneficiary must declare IRD as income for the year in which they receive it.

Understanding Income in Respect of a Decedent (IRD)

IRD is defined in Internal Revenue Code, section 691. Sources of income include the following:

• Uncollected salaries
• Wages
• Bonuses
• Commissions
• Vacation pay
• Sick pay
• Uncollected rent
• Retirement income

Other sources of IRD are:

• Payments for crops
• Interest and dividends accrued
• Distributions from certain deferred compensation and stock option plans
• Accounts receivable of a sole proprietor
• Gains from the sale of property (if the sale is deemed to occur before death, but proceeds are not collected until after death) 

How IRD Is Taxed

IRD is taxed in the same way it would have been had the decedent received the money while living. For example, capital gains are taxed at the capital gains rate, and uncollected compensation is taxed as ordinary income on the beneficiary’s tax return for the year they received it. There is no step-up in basis for IRDs.

How IRD Works for IRAs and 401(k)s 

Other common examples of IRD are distributions from tax-deferred qualified retirement plans (such as 401(k)s and traditional individual retirement accounts (IRAs)) that are passed on to a beneficiary. If an individual dies leaving a $1 million IRA to his beneficiary, the beneficiary will be responsible for paying taxes on any distributions made from the account.

The beneficiary may have to start taking required minimum distributions (RMD)s at a certain point. 

Spouses

A living spouse who is the sole beneficiary has certain rights not granted to another type of beneficiary. For example, a spouse can rollover the decedent’s IRA assets into their own IRA and postpone RMDs until age 73. Any beneficiary, spouse or otherwise, must follow specific RMD rules and is liable for applicable taxes on distributions. 

The age for RMDs was raised to 72 with the passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in December 2019. Then, in December 2022, the passage of the SECURE 2.0 Act raised the age to 73.

Impact on Estates

If the decedent died on or after reaching the age of RMDs, their RMD for the year of death may factor into their estate (for instance, if no specific beneficiaries were designated in the account file/paperwork for the retirement account where it was held). If the amount of the RMD were to push the decedent’s estate beyond the federal exclusion, an estate tax would kick in. The federal exclusion amount for 2024 is $13.61 million. 

To try to minimize this impact, individuals and married couples employ estate-planning strategies that transfer assets to trusts. One option is a credit shelter trust, which postpones estate taxes until the death of the surviving spouse.  

The Bottom Line

IRD is income that is owed to an individual who dies before receiving it. If a beneficiary receives this money, they will owe taxes on it.

If the IRD generates a tax liability for the decedent's estate, a beneficiary may be able to claim a deduction for estate taxes connected to the IRD amount.