Income in Respect of a Decedent (IRD) and How It’s Taxed

Income in respect of a decedent, usually shortened to IRD, is money a person had earned or had a legal right to receive before death but that was never reported on their final income tax return. Whoever ends up collecting that money — the estate or a beneficiary — owes income tax on it, at ordinary rates, in the year it’s actually received. Unlike most inherited property, IRD does not get a tax-free reset at death, and that single rule is behind most of the tax surprises families run into when they settle an estate.

What Counts as IRD

The IRS treats several categories of inherited money as IRD when the amounts weren’t included on the decedent’s final return:¹

Unpaid wages, commissions, and bonuses the decedent had earned but not yet been paid. A bonus whose amount is set after death still counts.
Balances in traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred retirement accounts. These are usually the largest IRD item in an estate because the decedent never paid income tax on the contributions or the growth.
Interest that had accrued on savings accounts, CDs, or U.S. Treasury bonds but had not been paid by the date of death.
The gain portion of installment sale payments still coming in on property the decedent sold during life.²
Renewal commissions on insurance policies or similar recurring contracts that keep paying after the salesperson’s death.

Qualified Roth IRA distributions are generally tax-free to beneficiaries and don’t create an IRD problem. The exception is earnings attributable to the period ending with the decedent’s date of death on a Roth that doesn’t meet the requirements for a qualified distribution; those earnings can be IRD.¹

Why IRD Doesn’t Get a Step-Up in Basis

Most inherited property gets what’s called a step-up in basis. A house the decedent bought for $200,000 that’s worth $500,000 at death gets a new basis of $500,000 in the heir’s hands, so an immediate sale produces no capital gains tax. That rule comes from Section 1014 of the tax code.

IRD is carved out of that rule. Section 1014(c) specifically denies the step-up for any property that represents a right to receive IRD.³ A $500,000 traditional IRA inherited from a parent is fully taxable as it comes out, exactly as it would have been for the parent. A $500,000 brokerage account of appreciated stock from the same parent could be sold the next day with little or no tax. Same estate, same dollar value, very different results.

The income also keeps its original character. If the decedent would have reported it as ordinary wages, it’s ordinary wages to the beneficiary. If an installment sale would have produced long-term capital gain, that gain character carries through.²

Who Owes the Tax, and When

The tax falls on whoever actually receives the money. Three patterns cover almost every situation:²

The estate collects the income. The executor reports it on the estate’s income tax return and the estate pays the tax.
A named beneficiary collects directly. A person listed as beneficiary on a retirement account, for example, reports the income on their own return as they take distributions.
The estate transfers the right to a beneficiary, who later collects. The beneficiary reports the income when it actually arrives.

Timing follows receipt, not death. A final paycheck collected by the estate this year and an IRA distribution taken by a beneficiary next year show up on two different returns in two different tax years. One caution worth flagging: if the estate or a beneficiary sells the right to receive IRD instead of collecting it, the fair market value of that right at the time of sale is still taxable income. Selling the right doesn’t make the tax go away.

How to Report IRD on Your Tax Return

Individual beneficiaries report IRD on Form 1040 in the year they receive it, on the same line the decedent would have used. Inherited IRA distributions go on the IRA distributions line. Unpaid wages go on the wages line. Estates report IRD on Form 1041, the fiduciary income tax return.¹

The 691(c) Deduction for Estate Tax Already Paid

A large IRD item sits inside the decedent’s gross estate for federal estate tax purposes and is also taxable as income when collected. Without relief, the same dollar would be taxed twice. Section 691(c) provides the relief: whoever reports the IRD income can deduct the portion of federal estate tax that was attributable to that IRD.²

The deduction is calculated by comparing the actual federal estate tax to what the estate tax would have been if the net IRD were removed from the gross estate. The difference is the total 691(c) deduction available, and if several beneficiaries share the IRD, they split the deduction in proportion to how much IRD each one received.⁴

Individual beneficiaries claim the deduction on Schedule A, line 16, as an “Other Itemized Deduction.”⁵ It is not a miscellaneous itemized deduction and is not subject to any percentage-of-income floor, so you claim it in full regardless of your adjusted gross income.⁶ Estates and trusts take the equivalent deduction on Form 1041.

One honest caveat: the 691(c) deduction only helps if the estate actually paid federal estate tax. For 2026 the basic exclusion amount is $15,000,000 per person, and married couples with proper planning can effectively double that.⁷ Estates below the exemption owe no federal estate tax, so there’s nothing to deduct against the income tax on the IRD. For most families, the income tax on IRD is simply the full tax bill.

Inherited Retirement Accounts and the 10-Year Rule

Retirement accounts are the biggest IRD item most beneficiaries will ever handle, and the rules on how quickly you have to empty them changed in 2020. Most non-spouse beneficiaries who inherit a traditional IRA or 401(k) must now withdraw the entire balance by the end of the tenth year after the account owner’s death.⁸

The older rule let non-spouse beneficiaries stretch distributions across their own life expectancy, spreading the income tax over decades. The 10-year window compresses that same income into a much shorter stretch. A beneficiary in peak earning years who inherits a large traditional IRA can easily get pushed into a higher bracket by the required withdrawals.

Some beneficiaries are exempt from the 10-year rule and can still use the life-expectancy method: surviving spouses, minor children of the account owner (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries not more than ten years younger than the decedent.

Ways to Reduce the Tax Impact

Timing and planning both matter, because IRD can produce a serious tax bill in a single year if you let it.

Spread Distributions Across the 10-Year Window

Nothing in the 10-year rule forces you to wait until year ten and take the whole balance at once. Roughly even withdrawals across the ten years usually keep more of the money in lower brackets than a lump-sum year would. If your income swings from year to year, taking more during lower-income years and less during higher-income years reduces the cumulative tax.

Name a Charity as the Retirement Account Beneficiary

A tax-exempt charity pays no income tax on an inherited IRA or 401(k). If a decedent was already planning to leave something to charity, naming the charity as the retirement account beneficiary and leaving other assets to family is efficient. The charity receives the full balance, and the family inherits assets that get a step-up in basis and carry no built-in income tax.

Roth Conversions During the Owner’s Lifetime

This one has to happen before death, but it’s worth understanding. Converting a traditional IRA to a Roth triggers income tax at conversion, but qualified Roth distributions to future beneficiaries are tax-free. An owner who converts during lower-income years pre-pays the tax at a lower rate and removes the IRD problem from the heirs’ side of the ledger entirely.

1
Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators
2
Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
3
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
4
eCFR. 26 CFR 1.691(c)-1 – Deduction for Estate Tax Attributable to Income in Respect of a Decedent
5
Internal Revenue Service. Instructions for Schedule A (Form 1040)
6
Office of the Law Revision Counsel. 26 U.S. Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
7
Internal Revenue Service. What’s New – Estate and Gift Tax
8
Internal Revenue Service. Retirement Topics – Beneficiary