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Income in Respect of a Decedent (IRD) History

IRD is taxable income that was earned but not received by an individual prior to his or her death. It is taxed in the same manner to the recipient as it would have been to the decedent had he or she lived to collect it. Good examples of IRD include deferred compensation, series EE savings bonds and date of death balances in IRAs and other tax-deferred retirement plans, just to name a few.

Beginning in 1918, all assets inherited from a decedent received a step-up in basis for income tax purposes. This meant that the market value of an asset at the owner’s death became its cost basis in the hands of the individual inheriting that asset. Additionally, beneficiaries paid no income tax on the value of the property they inherited. In 1934, however, lawmakers decided that certain items of income should not receive a step-up in basis and thus IRD was introduced. There were no IRAs at that time and little did officials know the amount of income tax that would one day be generated by their IRD concept.

Now, when a beneficiary inherits and then collects an item of income, he or she will owe income tax without a step-up in basis being available. In effect, this income will be subject to double taxation if it is also taxed in the decedent’s estate. However, rather than trash the IRD concept right then and there, Congress instead chose a band-aid approach to resolve this dilemma by creating an income tax deduction for the beneficiaries to offset the double taxation. This is called an IRD deduction.

In the case of an inherited IRA, the full value of an IRD deduction is equal to the amount of federal estate tax attributable to the IRA in the decedent’s estate (i.e. first calculate the federal estate tax by including the value of the IRA in the estate and then again by not including it - the difference is the amount of the IRD deduction.) The IRD deduction is used to reduce the beneficiary’s income tax on withdrawals made from the IRA. The deduction is generally applied in a systematic fashion until it is fully exhausted over time. In the case of multiple beneficiaries, it is prorated among all in the same proportions that they inherited the IRA.

An IRD deduction is often missed because the public does not generally understand it and many tax preparers have not encountered it before. If an IRD deduction was missed within the last three tax years, you can amend the applicable income tax return(s) to capture the deduction. This is true even if you were not obligated to pay the estate tax due.

Unfortunately, not a lot of official literature is published on this very valuable tax deduction. IRS Publication 559 (“Survivors, Executors, and Administrators”) details the types of income that qualify as IRD and provides examples of how to calculate it. This Publication can be accessed at www.irs.gov under “Forms and Publications.” However, you may be best served by consulting a financial advisor who is well-versed in the IRD rules and can provide you with expert guidance.

By Marvin Rotenberg and Jared Trexler
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*Copyright 2011 Ed Slott and Company, LLC


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

Can I transfer money from my IRA to my husband's Roth IRA? I am 35, and he is 36.

Thank you!

Gail Clements

No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.