Page 24 THE EVERETT ADVOCATE–Friday, October 4, 2019 Income in respect of a decedent By Joseph D. Cataldo I ncome in respect of a decedent (IRD) is income that was owed to a decedent at the time he or she died. This is found in Internal Revenue Code Section 691. Some examples of IRD would include retirement plan assets, IRA’s and IRA distributions, unpaid interest income, unpaid dividend income, salary or wages and sales commissions, lottery winnings, accounts receivable for cash basis self-employed individuals, etc. These items of IRD, along with other assets included in one’s estate, are ultimately distributed to the beneficiaries of the estate. While the beneficiaries receive most of the assets of the estate “income-tax free”, IRD assets are generally taxed at the beneficiaries’ ordinary income tax rates. However, if a decedent’s estate has already paid an estate tax on the IRD assets, a beneficiary may be eligible to take an IRD deduction based upon the amount of the estate tax paid attributable to that item of IRD. IRC Section 691(c). The IRD deduction is taken as an itemized deduction. It is a miscellaneous itemized deduction “not’ subject to the usual “two percent of adjusted gross income” floor. Many financial advisors and estate attorneys are focused on the federal or Massachusetts estate tax return and the transfer of assets to the beneficiaries of the estate, and often overlook the potential of the beneficiaries to take the IRD deduction on his or her individual income tax return. You would simply take the IRD asset that is includible on the estate tax return and divide that number by the total gross estate as shown on the estate tax return. The resulting percentage is then multiplied by the total estate tax paid. That amount is then claimed as an itemized deduction on your federal individual income tax return. You must claim the IRD deduction in the year you actually receive and report the taxable income generated from the IRD asset on your individual income tax return. Another way to figure out the IRD deduction is to figure out the estate tax with and without the IRD asset(s). The difference in the actual estate tax figures will be the IRD deduction amount to take. Beneficiaries will share in the IRD deduction proportionately. Accordingly, if there are only two 50% beneficiaries of the estate and both are receiving 50 percent of the IRD asset as well, each would be entitled to take 50 percent of the IRD deduction on his or her own tax return as an itemized deduction. It is important to look at the IRD deduction whenever an estate tax is actually paid and there are IRD assets includible on the estate tax return as part of the total estate tax calculation. Many times, this valuable deduction is simply overlooked. It is also wise to consider leaving IRD assets to qualified charities if you have a desire to benefit a charity. Why? If you left the IRD asset to an individual, that individual will have to pay taxes on that IRD at ordinary income tax rates. The Charity would pay $0 in taxes. Therefore, you would be better off bequeathing a savings account to a niece or nephew and the balance of your IRA to the charity. The savings account results in no income tax to your nephew and the IRA going to the charity avoids income taxes altogether. If there are percentages of one’s estate going to individuals and charities, it makes sense for the Personal Representative of the estate to cherry pick what assets will go to the individuals and what assets will go to the charity.
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