Income In Respect Of A Decedent — Income After Your Loved One Passes

When a person passes away, they may leave behind a variety of unfinished business. This often includes forms of income. How should their estate and heirs account for this income? Who may owe taxes on it? And where can you get help reporting it? Here's what every executor and beneficiary needs to know.

What Is Income In Respect of a Decedent?

Income earned by or due to the deceased individual is often received after their passing. For tax purposes, this is known as income in respect of a decedent (IRD). It may include taxable and nontaxable forms of income, such as royalties, unpaid wages, investment income, or profit from the sale of an asset prior to their death. 

How Is IRD Different From Estate Income?

Reporting income after a person has passed away falls into two categories. The first is IRD, which is income that was earned before their death. The second is income to which they had no right or wasn't generated until after their death.

For example, an employee may have earned a bonus in 2023 which isn't paid by their employer until 2024. This is income in respect of the decedent. However, interest earned on a bank account after the date of death is likely to be estate income. Both may be treated differently. 

Who Reports and Pays Taxes on IRD?

Whether you're an executor or the beneficiary of some of this income, you'll need to know whether or not you must report and pay taxes on it. In general, taxes are paid by the party which receives the income — either the estate or the beneficiary. The income is taxed just as it would have been if the late taxpayer had reported it, and it's reported in the standard income tax forms for each taxpayer. 

How Can You Avoid Double Taxation?

There is one particularly tricky element of IRD and taxes. This involves income that was received by the estate but which is eventually distributed to heirs. The estate may have originally reported and paid taxes on it. However, the beneficiary must also report and pay taxes when they receive it. The result could be double taxation. 

To avoid double taxation, the heir may claim a deduction for taxes paid by the estate on the same income. This sounds relatively easy, but it involves recalculating the original income tax obligation and separating what was generated by the IRD in question. 

Where Can You Get Help?

Does this sound confusing? If so, start by getting answers to your questions. Meet with a qualified accountant in your state. With their guidance, you'll fulfill your tax obligations while avoiding any unnecessary taxation. Call a local accounting firm to learn more.