Income In Respect Of A Decedent

Most inherited assets arrive without an income tax bill attached. A defined category does not, because it represents income the deceased person earned but never recognized.

What the category covers

Income in respect of a decedent describes amounts the person had a right to receive but had not yet included in income before death.

Traditional retirement account balances are the most common example, along with unpaid wages, accrued interest, and payments due under contracts or installment sales.

These amounts keep their character when they pass, so the recipient reports the income when it is received rather than inheriting it tax-free.

Why the step-up does not apply

Many inherited assets receive an adjusted basis at death, which is why heirs often sell without significant gain.

Items in this category are generally excluded from that treatment, because the income was never taxed in the first place and the adjustment would eliminate it entirely.

That distinction explains why a brokerage account and a retirement account of the same value are not equivalent in a beneficiary's hands.

The double-counting problem

The same amount can be included in the estate for estate tax purposes and taxed again as income when the beneficiary receives it.

Federal rules provide a deduction intended to relieve part of that overlap where estate tax was actually paid, and its calculation is technical.

Beneficiaries frequently do not know the deduction exists, and it is easily missed by a preparer who was not told the source of the income.

Planning implications for dividing an estate

Because assets in this category carry an embedded obligation, dividing an estate by face value can produce unequal outcomes after tax.

Directing such assets toward a charitable recipient is sometimes considered for that reason, since the treatment differs, but the structure has to be correct.

Whether that or any alternative is appropriate depends on the estate and on rules that change, so it is not a decision to make from a general description.

Who needs to be involved

Identifying which assets fall into this category requires knowing what the deceased person was owed and how each item was previously treated.

The personal representative, the beneficiaries and their preparers need that information, and it usually comes from the estate's records rather than from statements.

A tax professional should be engaged before distributions are taken, since timing can affect the amount reported in a given year.