Income in Respect
of a Decedent
When someone passes away, some of the income they earned does not go on their final tax return. It shows up later, on the estate’s return or on the beneficiary’s return, and it does not get the usual step-up in basis. If the estate also paid estate tax on that income, there is a deduction available that is frequently missed.
Last reviewed
Income that does not die with the person
The final tax return for someone who has passed covers income received from January 1 through the date of death. But some income was earned before death without actually being received. A final paycheck that was issued after death. Interest that had accrued but was not yet paid. An IRA that the person owned but had not yet withdrawn from.
This is called income in respect of a decedent, or IRD. It is income that the person had a right to, but that was not included on their final return because they never actually received it. The income does not go away. It is taxed when it is eventually received, either by the estate or by the beneficiary who inherits the right to it.
The most common IRD items
By far the largest source of IRD in most estates is retirement accounts: traditional IRAs, 401(k)s, 403(b)s, and similar plans. The entire balance of a traditional IRA is IRD because none of it was ever taxed during the owner’s lifetime.
Other common IRD items include:
- A final paycheck, bonus, or commission paid after death
- Accrued interest on bank accounts or bonds
- Dividends that were declared before death but paid after
- Accounts receivable from a business the person owned
- Remaining payments on an installment sale (the gain portion)
- Savings bond interest that had never been reported
If you are the executor, identifying these items is important because they affect which tax return they belong on. They do not go on the final 1040. They go on the estate’s Form 1041 (if the estate receives the income) or on the beneficiary’s return (if the beneficiary receives it directly, such as an inherited IRA).
No step-up in basis
This is the part that surprises most people. When someone dies, nearly every asset they owned receives a stepped-up basis. That means the value is reset to the date-of-death fair market value, and any gain that built up during their lifetime is wiped out for tax purposes.
IRD items are the exception. They do not get a step-up because the income was never taxed in the first place. An IRA worth $500,000 still has a basis of zero. When the beneficiary takes distributions, every dollar is taxable, just as it would have been for the original owner.
The same applies to other IRD items. If the person had $10,000 of accrued business receivables at death, whoever collects that $10,000 pays income tax on it. The step-up that applies to the house, the brokerage account, and other assets does not apply here.
The deduction most people miss
Here is where it gets important. If the estate was large enough to owe federal estate tax (Form 706), the IRD items were included in the estate’s value for estate tax purposes. That means the same income gets hit twice: once by the estate tax when the person dies, and again by income tax when someone actually receives it.
To prevent full double taxation, the tax code provides a deduction called the Section 691(c) deduction. It allows whoever pays income tax on the IRD to deduct the federal estate tax that was attributable to that specific IRD item.
For example, if an estate paid $200,000 in federal estate tax, and $60,000 of that tax was attributable to the IRA that a beneficiary inherited, the beneficiary can deduct $60,000 on their income tax returns as they take distributions from the inherited IRA. The deduction is spread across the years that the IRA is distributed.
This deduction is one of the most frequently missed items in estate and trust tax work. If you are a beneficiary taking distributions from an inherited IRA and the estate paid federal estate tax, ask whether the 691(c) deduction was calculated. We compute it on every engagement where it applies.
Where IRD shows up
As the executor, you need to know where each IRD item gets reported:
- Estate collects the income: It goes on the estate’s Form 1041. For example, if a final paycheck is paid to the estate, it is reported on the 1041, not the final 1040.
- Beneficiary receives it directly: It goes on the beneficiary’s personal return. For example, if a child is named as IRA beneficiary, every distribution they take is reported on their own 1040.
- Estate passes the right to receive it: If the estate distributes an installment note or assigns receivables to a beneficiary, the beneficiary reports the income when they eventually collect it.
Getting these items on the right return matters. The final 1040, the estate’s 1041, and the beneficiary’s 1040 each have different rates, brackets, and deductions available. Placing an IRD item on the wrong return is a common error that can either cost money or create audit exposure.
What we handle
- Identifying all IRD items and making sure each one is on the correct return
- Drawing the line between the final 1040 and the estate’s first Form 1041
- Computing the Section 691(c) deduction when estate tax was paid
- Pushing the 691(c) calculation to beneficiaries or their tax preparers
- Reporting inherited IRA distributions and other IRD items on beneficiary K-1s
- Installment obligation reporting when the estate holds notes receivable
Frequently Asked Questions
What is income in respect of a decedent?
Income in respect of a decedent (IRD) is income that the person who passed away had earned or had a right to receive, but that was not included on their final tax return because they had not actually received it before death. Common examples include IRA and 401(k) balances, a final paycheck issued after death, accrued interest, and payments from a business the person owned. This income does not disappear. It is taxed when someone actually receives it, whether that is the estate or a beneficiary.
Why does IRD not get a stepped-up basis?
Most assets that pass through an estate receive a stepped-up basis, meaning their value is reset to the date-of-death fair market value. This eliminates any built-in gain. IRD items are the exception. They do not receive a step-up because the income was never taxed in the first place. An IRA worth $500,000 has a basis of zero, which means every dollar withdrawn is taxable income. The same applies to other IRD items like accrued wages, installment payments, and business receivables. The income tax that the decedent would have owed is simply shifted to whoever actually receives the payment.
What is the Section 691(c) deduction?
When IRD items are included in the estate for estate tax purposes (on Form 706) and estate tax is paid on them, the person who eventually pays income tax on that same IRD can take a deduction for the estate tax that was attributable to it. This prevents the same income from being fully taxed twice, once as part of the estate and again as income. The deduction is available to whoever reports the IRD, whether that is the estate on its Form 1041 or a beneficiary on their individual return. It is one of the most commonly missed deductions in estate tax work.
Does an inherited IRA count as IRD?
Yes. Inherited IRAs and other qualified retirement accounts are the single largest source of IRD. Every distribution from an inherited traditional IRA is income in respect of a decedent. The money was never taxed during the original owner’s lifetime, and it does not receive a stepped-up basis at death. The beneficiary pays ordinary income tax on every withdrawal. If the estate also paid federal estate tax that included the IRA’s value, the beneficiary may be entitled to the Section 691(c) deduction on their own return to offset part of that income tax.
Related services
Final 1040
The decedent’s last return. IRD items go on the estate return, not here.
Estate Income Tax (1041)
Where IRD collected by the estate is reported and the 691(c) deduction is taken.
Inherited Assets & Basis
Most inherited assets get a step-up. IRD items do not. The distinction matters when selling.