IRD Tax Deduction

Income owed to a decedent at the time of their death is known as income in respect of a decedent (IRD). IRD assets may be a salary, IRA distributions, or unpaid interest and dividends, among other things. Although IRD assets are normally taxed at the ordinary tax rate of the beneficiaries, they may be eligible for a federal IRD tax deduction if the estate has paid federal estate taxes on the inherited asset. This deduction may reduce the federal income tax owed by the beneficiary on specific assets and prevent double taxation.

Determining the deduction

– To determine if the IRD tax deduction is applicable, the beneficiary must determine if the decedent’s estate paid an estate tax.

– The beneficiary can likely claim the IRD deduction if estate tax was paid on the items inherited.

– If the decedent’s estate paid no estate tax, the beneficiaries cannot claim the IRD deduction.

Claiming the Deduction

– The amount able to be claimed on the beneficiary’s tax return depends on the estate tax applicable to the IRD assets inherited.

– The amount of paid estate tax attributable to the IRD assets inherited can be claimed on the beneficiary’s tax return, but the beneficiary must itemize deductions by filling out a Schedule A, Miscellaneous Itemized Deductions, on IRS Form 1040.

– Beneficiaries may only claim their proportional share of the IRD deduction amount if there are multiple beneficiaries of the IRD assets.

– The IRD deduction must be claimed in the tax year in which the income was received.

If you have any questions about this deduction, please feel free to contact our office.