Income in Respect of a Decedent: Taxation, Deduction, and Claims

Income in respect of a decedent is money a person earned or had the right to receive before death but never collected, so it wasn’t reported on their final income tax return. When the estate or a beneficiary later receives that money, they owe ordinary income tax on it. If the estate was large enough to owe federal estate tax on the same dollars, Internal Revenue Code Section 691(c) allows the recipient to deduct the portion of that estate tax attributable to the income, softening what would otherwise be double taxation.¹

What Counts as Income in Respect of a Decedent

The decedent did whatever was necessary to earn the money. They simply didn’t live long enough to collect it. Whoever eventually receives the payment reports it as income in the year they receive it.

The most common source is a traditional IRA or 401(k) balance. Every dollar in those accounts was contributed pre-tax, so every dollar withdrawn by the beneficiary is ordinary income. A $500,000 inherited traditional IRA is $500,000 of IRD waiting to be taxed.

Other frequent examples include accrued but unpaid salary, deferred compensation, bonuses earned before death but paid afterward, remaining payments on installment sales, and accrued interest on U.S. Series EE savings bonds when the decedent hadn’t been reporting the interest annually. Nonqualified stock options held at death also generate IRD: when the beneficiary exercises them, the spread between the exercise price and market price is ordinary income, taxed the same way it would have been in the decedent’s hands.

The character of the income carries over. If the decedent would have reported a long-term capital gain on an installment payment, the beneficiary reports it as long-term capital gain. Ordinary income stays ordinary.

No Stepped-Up Basis

Most inherited assets get a basis reset to date-of-death fair market value, which erases built-in gain. IRD is the exception. Section 1014(c) specifically excludes IRD from the step-up rules, preserving the full income tax liability that would have applied to the decedent.² Beneficiaries who assume an inherited IRA works like inherited stock often discover this the hard way at tax time.

How IRD Gets Taxed

The right to receive IRD is an asset of the decedent’s estate. It goes on Form 706 at its fair market value and, if the estate is large enough, gets hit with federal estate tax at rates up to 40 percent. Then, when the beneficiary receives the payment, they owe income tax on the same dollars.

On a $500,000 traditional IRA, that can mean roughly $200,000 in estate tax followed by another $100,000 or more in income tax when the beneficiary withdraws the money. More than half the account can disappear to tax.

Section 691(c) is the relief valve. It does not reduce estate tax. It reduces the income tax owed by whoever receives the IRD, giving them back the federal estate tax that was caused by including that specific income in the gross estate.¹

Who Actually Qualifies for the Deduction

Federal estate tax must have actually been paid on the decedent’s estate. In 2026 the basic exclusion amount is $15,000,000 per person, or $30,000,000 for a married couple that used portability.³ Only the value above that threshold is taxed, so only estates exceeding the exemption generate any 691(c) deduction at all.

A $2 million IRA inherited from a parent whose total estate was $8 million produces no deduction. No federal estate tax was owed, so there’s nothing to allocate. The beneficiary just pays ordinary income tax on every dollar withdrawn.

Only federal estate tax counts. State estate taxes, state inheritance taxes, and generation-skipping transfer taxes do not enter the calculation.¹

How the Deduction Is Calculated

The calculation isolates the portion of federal estate tax caused by including the IRD in the estate, then allocates that amount among IRD recipients.¹

Net Value of IRD

Add up all IRD items in the gross estate, then subtract deductions in respect of a decedent (DRD): expenses the decedent owed before death that were paid afterward, such as unpaid state income taxes or accrued business expenses. If the estate held $900,000 of IRD and the decedent owed $50,000 in state income tax, the net IRD is $850,000.

Attributable Estate Tax

Take the actual federal estate tax from Form 706. Then recalculate a hypothetical estate tax as if the net IRD had been removed from the gross estate entirely. The difference between the two is the estate tax attributable to the IRD, and it becomes the total 691(c) deduction available across all recipients.⁴ If actual tax was $1,500,000 and the hypothetical tax without the $850,000 in net IRD was $1,160,000, the attributable estate tax is $340,000.

Allocation Among Recipients

Each recipient’s share of the deduction is proportional to the IRD they received that year relative to total IRD in the estate.⁴ A beneficiary who received $200,000 of the $850,000 net IRD gets 23.53 percent of the $340,000 total, or $80,000 deducted in the year the income is reported.

If a beneficiary ultimately collects less than the value included in the gross estate, the deduction is based on the smaller amount actually received. The deduction can’t exceed what the recipient actually got.⁴

Capital Gains IRD Works Differently

When the IRD item is a capital gain, usually from installment sale payments, Section 691(c)(4) requires the deduction to reduce the capital gain itself before capital gains rates are applied.¹ A $100,000 long-term capital gain from an inherited installment sale, offset by a $30,000 attributable deduction, becomes a $70,000 gain taxed at capital gains rates. The deduction shrinks the gain rather than offsetting ordinary income at a higher rate.

Where and When to Claim It

Reporting depends on who received the income.

If the estate itself receives and retains the IRD, both the income and the deduction go on Form 1041, the income tax return for estates and trusts.⁵ If the estate distributes the IRD to beneficiaries in the same year it comes in, income and deduction flow through to beneficiaries on Schedule K-1.

When an individual receives IRD directly, as a named IRA beneficiary for instance, they report the income on Form 1040 and claim the 691(c) deduction as an itemized deduction on Schedule A. It sits in its own category, not classified as a miscellaneous itemized deduction, and is not subject to any percentage-of-AGI floor.

Because it’s itemized, an individual only benefits if total itemized deductions exceed the standard deduction. For 2026 that’s $16,100 for single filers and $32,200 for married couples filing jointly.⁶ In practice, this rarely stops beneficiaries of estates large enough to owe federal estate tax, but it’s worth confirming. Estates and trusts filing Form 1041 face no itemization requirement.

Timing Across Multiple Years

The deduction follows the income. You claim it in the same year you report the IRD in gross income, not all at once.⁴ For inherited traditional IRAs, most non-spouse beneficiaries must empty the account within ten years of the original owner’s death, and the deduction is available each year in proportion to the IRD received that year.⁷ The total deduction across all years is capped at the attributable estate tax figure. Once cumulative deductions equal that ceiling, nothing further can be claimed.

Inherited Roth IRAs Are Not IRD

Inherited Roth IRAs don’t fit the IRD pattern the same way. Withdrawals of contributions are always tax-free, and withdrawals of earnings are tax-free once the account has been open at least five years.⁷ With no income tax owed, there’s no double taxation and no 691(c) deduction to claim, even though the Roth balance is still included in the gross estate.

What Beneficiaries Need to Claim It

The IRS won’t compute this deduction for you, and no form arrives from the estate calculating it automatically. To claim it, a beneficiary needs three things:

A copy of the final Form 706, which shows total estate value, the IRD items included, and the federal estate tax paid.
The attributable estate tax calculation, comparing actual tax to hypothetical tax without the IRD, prepared by the executor or the estate’s tax professional.
Records of IRD received each year, so cumulative deductions can be tracked against the total ceiling.

Ask the executor or estate attorney for the 691(c) calculation before filing. Preparers who don’t regularly work on estates often miss the deduction entirely, and on a large estate the dollars involved are significant enough to justify bringing in someone who handles this work routinely.

1
Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
2
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
3
Internal Revenue Service. What’s New — Estate and Gift Tax
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eCFR. 26 CFR 1.691(c)-1 – Deduction for Estate Tax Attributable to Income in Respect of a Decedent
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Internal Revenue Service. About Form 1041, US Income Tax Return for Estates and Trusts
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One Big Beautiful Bill
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Internal Revenue Service. Retirement Topics – Beneficiary