Income in Respect of a Decedent (IRD)

Most inherited property arrives income-tax-free with a fresh basis stepped up to date-of-death value. Income in respect of a decedent — IRD — is the exception that surprises families. Publication 559 defines it as "all income the decedent would have received had death not occurred" that wasn’t properly includible on the final return. The paycheck issued the week after death, the IRA that took decades to build, the installment note still paying out: all IRD.

Two consequences follow: someone still owes income tax on these amounts, and the usual basis step-up never applies. Here is how the pieces work.

Who pays the tax

Publication 559 assigns the income to whoever collects it. IRD must be included in the income of: the decedent’s estate, if the estate receives it; the beneficiary, if the right to income passed directly to the beneficiary and the beneficiary receives it; or any person to whom the estate properly distributes the right to receive it.

So a payable-on-death account’s accrued interest lands on the named beneficiary; a final commission check paid to the probate estate lands on the estate’s Form 1041 — and if the estate then distributes it, the character and the tax follow the distribution out to the beneficiary. Publication 559 confirms distributions retain "the same character for the beneficiary that it had for the estate."

Common examples

The recurring IRD categories in Publication 559:

Wages, bonuses, and commissions earned before death but unpaid at death — and the income is not reduced by employer withholding
Interest accrued but unpaid, and dividends declared but unpaid, as of the date of death
Distributions from inherited traditional IRAs and employer retirement plans, to the extent of amounts the decedent was never taxed on
Payments still due on an installment sale the decedent entered before death
The decedent’s final share of partnership or S corporation income, and crop shares or rents attributable to pre-death periods

Wage wrinkle: IRD wages paid after death aren’t subject to federal income tax withholding — but if paid in the calendar year of death they are still subject to Social Security and Medicare tax.

No basis step-up — by statute

The step-up rule of section 1014 sets an inherited asset’s basis to date-of-death fair market value — and then subsection (c) removes IRD from it entirely: "This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691." An inherited brokerage account’s appreciation escapes income tax; an inherited IRA’s never does. The full deferred income comes out taxable to the recipient, exactly as it would have to the decedent.

The section 691(c) deduction — the consolation prize

Because large IRD items can be hit by both federal estate tax and income tax, section 691(c) gives the recipient an income tax deduction for the estate tax attributable to the IRD. Per Publication 559, the deduction is claimed in the same year the IRD is included in income; individuals take it as an itemized deduction on Schedule A line 16, and estates deduct it on Form 1041 line 19. When the IRD is capital gain, the gain is instead reduced (not below zero) by the attributable estate tax.

The deduction exists only when a Form 706 was actually filed and estate tax was attributable to the IRD — for the large majority of estates below the federal filing threshold, there is no 691(c) deduction because there was no estate tax. When an estate or trust passes IRD out to a beneficiary, the beneficiary’s share of the deduction arrives on Schedule K-1 box 10.

Frequently asked questions

What is income in respect of a decedent in plain terms?⌄

Money the decedent had earned or locked in but hadn’t yet received — and that therefore never made it onto their final Form 1040. Whoever collects it (estate or beneficiary) reports it as income, with the same character it would have had for the decedent.

Is an inherited IRA really taxable? I thought inheritances were tax-free.⌄

The inheritance itself isn’t taxed as a gift or bequest, but distributions from an inherited traditional IRA are IRD — income the decedent deferred and never paid tax on. Section 1014(c) denies IRD any basis step-up, so distributions are taxable to the beneficiary as received.

Who reports the decedent’s last paycheck?⌄

Whoever receives it. Paid to the estate, it goes on the estate’s Form 1041 under the estate’s EIN; paid directly to a surviving spouse or named beneficiary, it goes on that person’s return. It never goes on the decedent’s final Form 1040, because it wasn’t received before death.

What is the IRD deduction and who gets it?⌄

The section 691(c) deduction lets the person taxed on IRD deduct the federal estate tax attributable to that income — an itemized deduction on Schedule A line 16 for individuals, line 19 of Form 1041 for estates. It only exists if a Form 706 was filed and estate tax was actually attributable to the IRD.

Does IRD get the stepped-up basis other inherited assets get?⌄

No. Section 1014(c) explicitly excludes IRD from the basis step-up. That is the defining tax feature of IRD: the built-in income stays taxable to whoever inherits the right to receive it.

Related guides

Official sources

Tax rules, rates and deadlines change — verify current requirements against the IRS sources above before acting. This guide is general information, not tax or legal advice.

Income in Respect of a Decedent (IRD), Explained