What counts as Income in Respect to a Decedent?

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Please refer to the following knowledge base articles for background: The problem of the disappearing income: Income in Respect to a Decedent and What are Income in Respect of a Decedent (IRD) and the IRD deduction?

The IRS regulations suggest that income in respect of decedent includes “amounts to which a decedent was entitled as gross income but which were not properly included” on the final return. Given this relatively vague definition, the courts have interpreted IRD in a flexible fashion.

Examples may be helpful: The situation is relatively straightforward with personal service income such as wages earned during live but paid after death and fees and commissions earned but not collected. For investment income in the case of the cash method taxpayer, which is the majority, amounts accrued but unpaid at death are IRD and amount accruing after death are taxed directly to the estate or other successor. Investment vehicles that generate regular current income can be apportioned on a daily basis between the period ending on the date of death and the period after death. In contrast, dividend income, accrues only on the “record date” on with shareholders of record become entitled to a dividend to be paid on a specified future date. If the decedent died on or after the record date but has not received the dividend income, the successor will have to report this as income.

A special situation may arise with sales proceeds. If a cash-based method decedent enters into a binding agreement for the sale of real estate and fulfills substantially all the prerequisites for completion of the transaction but dies before the closing date and the decedent’s personal representative completes the sale, the estate will take a carryover basis in the property and report any gain on the sale as IRD.

In contrast to the above where the estate or successor has a carryover basis on the property and therefore is subject to capital gains tax, when a decedent dies owning appreciated property but has not taken any steps to dispose of it doing live, the successor generally enjoys a fresh start basis and thus escapes any tax on unrealized appreciation that accrued to the date of death. The situation may be tricky in borderline cases and it needs to be determined whether preparation’s for sale other disposition were merely preliminary or head rage to sufficiently advanced stage to give rise to IRD.

In the case of a survivor annuity, but not with a single-life annuity, the amounts payable to the surviving beneficiary after the decedents death are treated as IRD. Once the investment in the annuity contract has been recovered, the beneficiary is fully taxable on the remaining annuity payments.See also Notes on the decedent’s final tax return – Annuities.

For retirement accounts the decedent’s basis carries over to the successor. Amounts distributed from the account after death would be taxable to the recipient as IRD under the rules of IRC section 72 relating to annuities, subject to an exclusion ration reflecting the decedent basis, if any. The bases will be zero if the retirement account has been funded entirely with tax deductible contributions. However, if a retirement account was fully or in part funded with after-tax contributions, the account may have a positive basis.

In analogy to the preceding, partnership income attributable to the period before the decedent’s death should be included in the partner’s final income tax return. Partnership income attributable to postmortem periods will be included in the income tax return of the successor to the deceased partner’s interest (usually the estate).

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