IRD
is gross income the decedent had a right to receive that is not includable
in the final tax return. For a cash basis decedent, IRD is income earned but
not received prior to death. IRD is taxable income to the recipient the
year received. If IRD is paid to the estate, it is reported on the
fiduciary return. If IRD is paid directly to a beneficiary, it is reported
on the beneficiary’s tax return.
Income in respect of the decedent (IRD)
includes:
• Uncollected salaries, wages, bonuses,
commissions, vacation pay, and sick pay of a cash-basis employee.
• Certain deferred compensation and stock
option plans.
• Qualified pension plans, profit sharing
plans, SEP, Keogh, and IRA except nondeductible contributions.
• Accounts receivable of a cash basis
sole proprietor.
• Interest and dividends accrued but
unpaid at death of cash basis decedent.
• Rents and royalties accrued before
death of cash basis taxpayer.
• Gain from the sale of property if the
sale is deemed to occur before death, but proceeds are not collected until
after death.
• Difference between the face amount and
the decedent’s basis in an installment sales obligation.
• Interest accrued through the date of
death on Series EE bonds, unless (1) decedent elected to report interest
annually, or (2) the interest was reported on the decedent’s final Form
1040.
• Annuity payments in excess of
decedent's investment in the contract.
Deductions in Respect of the Decedent: Business
expenses, income production expenses, interest, and taxes owed by the
decedent but not allowed on the final Form 1040 can be deducted by the
estate in the tax year paid. Similarly, if a beneficiary receives income
or property from a decedent and is obligated to pay such expenses, they
are deductible on the beneficiary’s tax return in the year paid.
Federal Estate Tax Deduction: IRD is
included in the decedent’s gross estate on IRS Form 706. If federal estate tax is
paid on IRD, a deduction can be claimed on the income tax return that must
report the IRD.
Partner In A Partnership
For partnership tax years beginning after
12/31/97, a partner’s tax year automatically terminates at death. The
partner’s share of income through the date of death is reported on the
deceased partner’s final tax return. Self-employment tax is imposed on a
general partner’s distributive share of income through the date of
death.
S Corporation Shareholder
The final tax return must include the decedent’s
pro rata share of S corporation income, deductions, losses, etc. up to the
date of death.
Self-Employment Tax
Business income reported on Schedules C and
F is subject to self-employment tax on the final Form 1040 even though the
taxpayer is deceased. Business income reported on Form 1041 is not subject
to self-employment tax.
FICA Withholding
A deceased employee will usually have wages
accrued but not paid at the time of death. These wages are income in
respect of the decedent and are not reported on the final Form 1040.
Accrued wages paid to the estate in the calendar year of death are subject
to FICA and FUTA taxes. FICA taxes should not be withheld from wages paid
to the estate after the calendar year of death. [Rev. Rul. 86-109] The
employer should include the accrued wages in the Social Security and
Medicare wages reported on the decedent’s W-2. However, the accrued
wages should not be included in the total taxable wages reported on
the W-2. The employer should issue a Form 1099-MISC to the estate for the
accrued wages.
