What Is Income in Respect of a Decedent and How Is It Taxed?

Income in respect of a decedent, often shortened to IRD, is money a person had earned or had the legal right to receive before dying but had not actually collected by the date of death. It is not treated like most inherited property. There is no stepped-up basis, because the dollars were never taxed during the decedent’s lifetime. Whoever eventually receives the money, whether the estate or a named beneficiary, owes ordinary income tax on it in the year it is received. If the estate is large enough to owe federal estate tax, the same dollars can be taxed twice, and Internal Revenue Code Section 691(c) offers a deduction to soften that overlap.

What Counts as IRD

The clearest example is a final paycheck. Wages, bonuses, commissions, and deferred compensation that the decedent earned but that arrived after death are not reported on the final Form 1040. They are taxable to whoever receives them.

Traditional IRAs, 401(k)s, SEPs, and tax-sheltered annuities are usually the largest source of IRD for modern beneficiaries. Every dollar in these accounts was contributed pre-tax or grew tax-deferred, so nothing has ever been taxed. When a beneficiary takes a distribution, the full amount is ordinary income.¹

Other common forms of IRD include:

Series EE and Series I savings bond interest that accrued through the date of death, when the decedent had been deferring interest reporting until redemption. If the decedent had elected to report interest annually or reported it on the final return, that portion is not IRD.²
Dividends declared before the date of death but received afterward, because the decedent did not constructively receive them in time to put them on the final return.³
Installment sale payments received after the seller’s death. The transfer of the note at death is not itself a taxable event, but each payment that follows keeps the gain character it would have had in the seller’s hands.⁴
A deceased partner’s share of partnership income through the date of death.⁵
Crop shares or cash rent owed to a landlord who leased farmland. Unharvested crops and livestock raised by a cash-basis farmer who was actively working the land are generally treated as property with a stepped-up basis instead.

Why Roth IRAs Are the Exception

Inherited Roth IRAs generally do not create IRD. Roth contributions were made with after-tax dollars, so withdrawals of contributions are always tax-free to the beneficiary, and earnings are also tax-free as long as the Roth has been open at least five years.⁶ The distribution timing rules still apply, including the 10-year rule described below, even though the money comes out tax-free.

Who Owes the Tax

The tax follows the cash. If a named beneficiary collects an IRA distribution directly, that beneficiary reports it on their own Form 1040 for the year of receipt, and it never touches the estate’s return. If the money instead flows into the estate’s bank account because no beneficiary was named, the personal representative reports the income on the estate’s Form 1041 and pays the tax before distributing what remains.³

An estate can also assign the right to receive IRD to an heir before the money actually arrives. If the estate hands off an uncollected legal settlement to a beneficiary and closes, the beneficiary picks up the tax when the settlement is paid.

Selling or Gifting the Right to IRD

Transferring an IRD right to someone other than the natural heir accelerates the tax. Sell the right and you owe income tax on the sale price or the fair market value, whichever is higher. Give it away and you owe income tax on the fair market value at the time of the gift.⁷ The rule stops people from shifting income to lower-bracket taxpayers without a tax cost. The exception is a distribution from the estate to the beneficiary who would have received the right anyway through normal inheritance.

Inherited Retirement Accounts and the 10-Year Rule

For most non-spouse beneficiaries of an account owner who died in 2020 or later, the whole account has to be emptied by the end of the tenth year after the year of death.⁶ This replaced the old “stretch IRA” strategy that let beneficiaries pull distributions over their own life expectancy.

Whether you also have to take annual distributions during those ten years depends on the decedent’s status. If the original owner had already started required minimum distributions before death, the beneficiary must continue taking annual distributions and clear the balance by year ten.⁸ If the owner died before their required beginning date, no annual distributions are required during the window, but the account still must be fully drained by the deadline.

How you spread the distributions matters. A lump sum in year ten can push a beneficiary into a much higher bracket. Someone who inherits a $500,000 traditional IRA might save tens of thousands of dollars by pulling roughly $50,000 a year instead of taking the whole balance at once.

A narrower group of “eligible designated beneficiaries” can still use life-expectancy distributions instead of the 10-year rule:

A surviving spouse, who can also treat the account as their own or roll it into their own IRA.
Minor children of the account owner, until they reach the age of majority, at which point the 10-year clock starts. This category covers the owner’s own children, not grandchildren.
Disabled or chronically ill individuals, as the IRS defines those terms narrowly.
Beneficiaries who are not more than 10 years younger than the decedent.⁶

The Section 691(c) Deduction for Estate Tax Already Paid

Because the right to receive IRD is an asset the decedent owned at death, its value is included in the gross estate for federal estate tax. Then, when the beneficiary collects the income, it is taxed again as ordinary income. A $200,000 inherited IRA in a taxable estate can lose a significant share to estate tax and then lose another chunk to income tax.

Section 691(c) lets the recipient deduct the federal estate tax attributable to the IRD.⁹ The calculation compares the actual estate tax paid against the estate tax that would have been owed if the IRD items were removed from the estate. The difference is the deduction, and it requires reviewing the Form 706 filed for the estate.¹⁰

For 2026, the federal estate tax exemption is $15,000,000 per individual, following the increase enacted under the One, Big, Beautiful Bill Act.¹¹ Married couples can effectively shield up to $30 million using portability. For estates below that threshold, no federal estate tax is owed, so there is no double tax and no 691(c) deduction to claim.

Individuals claim the deduction as an itemized deduction on Schedule A of Form 1040, under “other itemized deductions.” Though it is sometimes loosely called a miscellaneous deduction, it is specifically excluded from the category of miscellaneous itemized deductions suspended by the Tax Cuts and Jobs Act, and it is not subject to any AGI floor.¹² You do have to itemize to claim it. Estates and trusts claim their share directly on Form 1041 without needing to itemize.

Deductions in Respect of a Decedent

The mirror image of IRD is deductions in respect of a decedent, or DRD. These are expenses the decedent had incurred but not yet paid, that would have been deductible had they lived to write the check. Common examples include unpaid business expenses, interest owed, and state and local taxes accrued but not paid.³ They are claimed when actually paid, not when the decedent incurred the obligation. Percentage depletion deductions also pass through to whoever receives the related IRD income.

If an estate collects $50,000 in unpaid consulting fees (IRD) but also pays $8,000 in business expenses the decedent owed (DRD), the DRD reduces the net taxable amount.

Directing IRD Assets to Charity

One of the most tax-efficient moves in estate planning is naming a qualified charity as the beneficiary of IRD-heavy accounts and leaving other assets to family. A tax-exempt charity pays no income tax on the distribution, so the full value of the account goes to the cause. The estate also gets a charitable deduction for the full account value, reducing or eliminating estate tax on those dollars. Meanwhile, assets like real estate and stocks get a stepped-up basis when inherited by family, wiping out the built-in capital gain. Reversing that arrangement wastes the tax benefit on both sides.

How to Report IRD and Avoid a Surprise Bill

Individual beneficiaries report IRD on Form 1040 for the year they receive it. Inherited IRA distributions appear on line 4b.¹ If the estate or a trust receives the IRD, it goes on Form 1041. An estate must file Form 1041 if its gross income reaches $600 or more for the tax year.¹³ Inherited installment payments are reported on Form 6252; the IRS lets filers attach a statement if the beneficiary does not have complete information on the original sale.⁴

A large IRD distribution can create a surprise bill if withholding is thin. Default withholding on nonperiodic IRA distributions is only 10 percent, which is well below the marginal rate for most beneficiaries taking a six-figure distribution. Beneficiaries can submit Form W-4R to increase withholding, or make quarterly estimated payments. The safe harbor is to pay at least 100 percent of the prior year’s tax liability (110 percent for higher-income filers) or 90 percent of the current year’s liability through withholding and estimated payments combined.

Underreporting and late-filing penalties apply to IRD like any other income. The failure-to-pay penalty starts at 0.5 percent of the unpaid tax per month and caps at 25 percent. The failure-to-file penalty runs 5 percent per month, also capping at 25 percent.¹⁴ Interest accrues on top of both until the balance is paid.

1
Internal Revenue Service. Distributions from Individual Retirement Arrangements (IRAs)
2
TreasuryDirect. Tax Information for EE and I Bonds
3
Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
4
Internal Revenue Service. Publication 537 (2025), Installment Sales
5
eCFR. 26 CFR 1.753-1 – Partner Receiving Income in Respect of Decedent
6
Internal Revenue Service. Retirement Topics – Beneficiary
7
eCFR. 26 CFR 1.691(a)-4 – Transfer of Right to Income in Respect of a Decedent
8
Internal Revenue Service. Notice 2024-35, Certain Required Minimum Distributions
9
Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
10
Internal Revenue Service. Instructions for Form 706 (Rev. September 2025)
11
Internal Revenue Service. What’s New – Estate and Gift Tax
12
eCFR. 26 CFR 1.691(c)-1 – Deduction for Estate Tax Attributable to Income in Respect of a Decedent
13
Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1
14
Internal Revenue Service. Notice 746