Income in Respect
of a Decedent
You inherited an IRA, received a final paycheck on someone’s behalf, or got a K-1 from an estate with income items that belonged to the person who passed. That income is fully taxable, with no step-up in basis. But if estate tax was paid, there is a deduction that can offset part of the tax, and it is one of the most commonly missed items on beneficiary returns.
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What this means for you
When someone passes away, most of the assets they leave behind receive a stepped-up basis. The house, the brokerage account, the rental property: their value is reset to the date-of-death fair market value, so the appreciation from all the years they held it is never subject to income tax. If you inherit a stock that was purchased for $10,000 and is worth $100,000 at death, your basis is $100,000. You can sell it immediately and owe nothing.
But some items do not get this treatment. Income that the person earned before death but never actually received is called income in respect of a decedent, or IRD. This income is taxable to whoever eventually receives it. There is no step-up, no reset, no forgiveness. The full amount is taxable, just as it would have been to the original owner.
The inherited IRA: the biggest example
The most common IRD item, by far, is an inherited traditional IRA or 401(k). The original owner contributed money to the account, got a tax deduction, and let the investments grow tax-deferred. None of that money was ever taxed. When you inherit the account, every dollar you withdraw is ordinary income on your return.
Under the SECURE Act, most non-spouse beneficiaries must empty an inherited IRA within 10 years of the original owner’s death, with annual required minimum distributions along the way. This concentrates a significant amount of taxable income into a relatively short window, which makes planning the timing and size of withdrawals important.
Inherited Roth IRAs are different. Because the original owner already paid tax on Roth contributions, most distributions from an inherited Roth IRA are tax-free. The 10-year distribution requirement still applies, but the tax impact is minimal.
Other IRD items you might receive
Besides retirement accounts, other items you might receive as a beneficiary that are considered IRD:
- A final paycheck or bonus that was paid after the person’s death
- Accrued interest on savings accounts or bonds that had not been paid before death
- Payments from an installment sale (the gain portion of each payment)
- Income from a business the person owned (accounts receivable, earned commissions)
- Savings bond interest that the person had never reported
If you received a K-1 from the estate, some of the income on that K-1 may be IRD. It retains the same character it would have had for the person who passed: ordinary income stays ordinary, capital gain stays capital gain.
The deduction you may be missing
If the estate was large enough to pay federal estate tax (the exemption is $15 million per person in 2026, permanently raised by the One Big Beautiful Bill Act), the value of IRD items like the IRA was included in the taxable estate. That creates double taxation: the estate paid estate tax on the IRA’s value, and you pay income tax on every distribution.
The tax code provides a deduction to offset this, called the Section 691(c) deduction. Here is how it works:
- The estate’s Form 706 shows the total federal estate tax paid
- A calculation determines how much of that estate tax was attributable to the IRD items (like the IRA)
- You deduct that amount on your income tax returns, spread across the years you receive the IRD
This deduction is frequently missed, especially when the estate and the beneficiary use different tax preparers. The beneficiary’s preparer may not know that estate tax was paid, or may not know how to calculate the portion attributable to the inherited IRA. We compute the 691(c) deduction on every engagement where it applies and make sure the information reaches whoever prepares the beneficiary’s return.
How to report IRD on your return
The reporting depends on how you received the income:
- Inherited IRA distributions: Reported on your Form 1040 based on the 1099-R you receive from the IRA custodian. The full distribution amount is generally taxable as ordinary income.
- K-1 from the estate: Report the K-1 amounts in the appropriate places on your return. The character (ordinary, capital gain, tax-exempt) follows the K-1.
- Direct payments: If you received a final paycheck or other payment directly, report it as the type of income it represents (wages, interest, etc.).
The Section 691(c) deduction, if applicable, is claimed as an itemized deduction on your Schedule A. It is not a miscellaneous itemized deduction, so it is not affected by the disallowance of those deductions, which the One Big Beautiful Bill Act made permanent. It is available in full.
What we handle
- Identifying IRD items on your K-1 or in income you received directly
- Reporting inherited IRA distributions correctly, including coordination with the 10-year rule
- Computing the Section 691(c) deduction when estate tax was paid on IRD you received
- Coordinating with the estate’s executor or tax preparer to get the Form 706 data needed for the calculation
- Planning the timing of inherited IRA withdrawals to manage your tax bracket across the 10-year window
Frequently Asked Questions
I inherited an IRA. Is every distribution taxable?
Yes, for a traditional IRA. Every dollar you withdraw from an inherited traditional IRA is ordinary income on your tax return. Unlike most inherited assets, an IRA does not receive a stepped-up basis at death. The money was never taxed during the original owner’s lifetime, so it is taxed when you take it out. If the estate was large enough to pay federal estate tax and the IRA was included in the taxable estate, you may be entitled to a deduction (the Section 691(c) deduction) that offsets part of the income tax. Inherited Roth IRAs are generally not taxable because the original owner already paid tax on the contributions.
What is the Section 691(c) deduction and how do I get it?
The Section 691(c) deduction is available when the same income is taxed twice: once as part of the estate (through the federal estate tax on Form 706) and again as income to you when you receive it. The deduction equals the portion of the federal estate tax that was attributable to the IRD item you received. For example, if you inherited an IRA and the estate paid estate tax that included the IRA’s value, you can deduct the estate tax attributable to that IRA on your income tax returns as you take distributions. The deduction is calculated from the estate’s Form 706 and spread across the years you receive the IRD. Your tax preparer needs the 706 information to compute it.
Why does my inherited IRA not get a stepped-up basis like the house did?
The step-up in basis applies to most inherited assets because those assets have already been subject to tax on any gain (or would have been if sold during the owner’s lifetime). An IRA is different because the money inside it was never taxed. The original owner got a tax deduction when they contributed, and the growth was tax-deferred. Since no income tax was ever paid on it, the tax code does not wipe out the tax obligation at death. Instead, whoever receives the distributions pays the income tax, exactly as the original owner would have. The step-up rule specifically excludes items that constitute income in respect of a decedent.
I received a K-1 from an estate with IRD items. How do I report it?
IRD items that flow through the estate to you will appear on your Schedule K-1 from the estate’s Form 1041. The income retains the same character it would have had if received by the person who passed away: ordinary income stays ordinary, capital gain stays capital gain. Report the K-1 amounts on your individual return in the appropriate places. If the estate paid federal estate tax, ask the executor or the estate’s tax preparer whether a Section 691(c) deduction was calculated for your share of the IRD. That deduction should also be reflected on your return.
Related services
Retiree Tax Returns
Inherited IRAs, RMDs, the 10-year rule, and IRMAA implications from large distributions.
Inherited Assets & Basis
Most inherited assets get a step-up. IRD items are the exception. The distinction matters when selling.
Beneficiary K-1 Returns
Estate K-1s may include IRD items with the 691(c) deduction. We make sure both are reported correctly.