Income in Respect of a Decedent (IRD): Tax Rules and Reporting

Income in respect of a decedent, usually shortened to IRD, is income a person earned or had a right to receive before death but had not yet been paid, and therefore never reported on a final tax return. Whoever eventually collects that money, whether the estate or a named beneficiary, owes ordinary income tax on it at their own rate. IRD does not get the tax-free reset that most inherited property receives, and that single rule is behind most of the tax surprises families run into while settling an estate.

What Counts as IRD

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

Unpaid wages, salary, commissions, or bonuses the decedent had earned before death. A bonus whose amount isn’t determined until after death still counts.
Balances in traditional IRAs, 401(k)s, 403(b)s, and similar tax-deferred retirement accounts. These are by far the largest IRD items in most estates because the decedent never paid income tax on the funds.
Interest on savings accounts, CDs, or U.S. Treasury bonds that had accrued but had not been paid by the date of death.
The remaining gain portion of installment sale payments still coming in from property the decedent sold before death.¹
Renewal commissions on insurance policies or other recurring contracts that keep paying out after the salesperson’s death.²

Qualified distributions from an inherited Roth IRA are generally tax-free to the beneficiary, so most Roth inheritances don’t create an IRD problem.²

Why IRD Is Taxed Differently From Other Inherited Property

When someone dies, most of their assets get a step-up in basis under Section 1014 of the tax code. A house the decedent bought for $200,000 that’s worth $500,000 at death gets a new tax basis of $500,000 for the heir, who can sell it immediately and owe no capital gains tax.

IRD is carved out of that rule. Section 1014(c) says the step-up does not apply to any property that represents a right to receive income in respect of a decedent.³ So if the decedent held a $500,000 traditional IRA, the beneficiary who inherits it doesn’t get a fresh $500,000 basis. The full balance is taxable as income when withdrawn, just as it would have been for the decedent.

This distinction catches people off guard. A beneficiary who inherits a brokerage account of appreciated stock and a traditional IRA of roughly equal value can owe dramatically different amounts of tax on the two, even though both arrived in the same estate on the same day.

Who Pays the Tax, and When

The tax falls on whoever actually receives the income, and it keeps the same character it would have had in the decedent’s hands. Ordinary wages stay ordinary; a long-term capital gain from an installment sale stays a long-term capital gain.¹ Three scenarios cover almost every case:

If the estate collects the payment, the executor reports and pays the tax on the estate’s fiduciary income tax return.
If a person is named directly as beneficiary, as on a retirement account, that person reports the income on their own return when they take distributions.
If the estate holds the right to IRD and then transfers it to a beneficiary, the beneficiary reports the income when they eventually collect it.¹

The tax is owed in the year the income is actually received, not the year the decedent died. A final paycheck collected in the year of death and an IRA distribution taken the following year land on two different returns for two different tax years.

How to Report IRD on a 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. When the estate receives the income, it’s reported on Form 1041, the fiduciary income tax return.²

The Section 691(c) Deduction for Estate Tax Paid on IRD

A large IRD item can get taxed twice: once as part of the decedent’s gross estate for federal estate tax purposes, and again as income to the beneficiary who withdraws it. Section 691(c) softens that by letting the person who reports the IRD income deduct the portion of federal estate tax attributable to that IRD.¹ The deduction doesn’t wipe out the income tax, but it reduces it meaningfully.

The mechanics: figure the total value of IRD items in the gross estate, net of any related deductions, then compare the actual estate tax to what it would have been with that net IRD removed. The difference is the total 691(c) deduction available.⁴ When several beneficiaries share the IRD, they split the deduction in proportion to how much each received.

Individuals claim it as an itemized deduction on Schedule A, line 16, “Other Itemized Deductions.”⁵ It is not a miscellaneous itemized deduction and is not subject to any percentage-of-income floor.⁶ Estates and trusts claim it directly on Form 1041.

One boundary matters here: the 691(c) deduction is only available when 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 it.⁷ For the vast majority of estates, no federal estate tax is owed, so no 691(c) deduction exists. The income tax on the IRD is the full bill.

Inherited Retirement Accounts and the 10-Year Rule

Since retirement accounts are the largest IRD item in most estates, the withdrawal timeline drives most of the tax planning. Under federal rules that took effect in 2020, most non-spouse beneficiaries who inherit a traditional IRA or 401(k) must empty the entire account by the end of the tenth year after the account owner’s death.⁸

The older approach let a non-spouse beneficiary stretch distributions over their own life expectancy, spreading the income across decades. Compressing that into ten years can push a beneficiary in peak earning years into a higher bracket.

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

Ways to Reduce the Tax Impact

Both the estate plan the decedent left behind and the beneficiary’s own timing decisions affect the final tax bill.

Name a Charity as Beneficiary of Retirement Accounts

A tax-exempt charity that inherits an IRA or 401(k) pays no income tax on the distribution. If the decedent intended to leave money to charity anyway, directing the retirement account to the charity and leaving other assets to family members captures a real benefit. The charity gets the full balance, and family members inherit assets that come with a step-up in basis and no built-in income tax.

Spread Distributions Across the Ten Years

Beneficiaries under the 10-year rule aren’t required to wait until year ten. Taking roughly equal distributions each year keeps you in a lower bracket than a single lump-sum withdrawal would. If your own income swings from year to year, weighting withdrawals toward your lower-income years reduces the cumulative tax.

Roth Conversions During the Owner’s Lifetime

This one is a move the account owner makes before death. Converting a traditional IRA to a Roth IRA triggers income tax at the time of conversion, but qualified Roth distributions to 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 for their heirs. It only helps if the conversion happens before death, but for families who plan ahead it is the most effective way to reduce IRD.

1
Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
2
Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators
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