Legal Definitions - income in respect of a decedent

Income in Respect of a Decedent (IRD) refers to specific types of income that a person was entitled to receive before their death, but which were not actually paid to them until after their death. This income is then received by their estate or their designated beneficiaries. The key characteristic of IRD is that it would have been taxable income to the deceased person had they received it while alive. Because it's received after death, it bypasses the deceased's final income tax return and is instead taxed to the recipient (the estate or beneficiary) when they receive it. This ensures that the income does not escape taxation entirely.

Here are some examples to illustrate how "Income in Respect of a Decedent" applies:

• Unpaid Salary or Commissions: Imagine a marketing executive who completed a major project and earned a significant bonus in December. However, they tragically pass away in early January before the company's payroll department processes and pays out the bonus. The company then pays this bonus to the executive's estate or designated beneficiary.

  How it illustrates IRD: The bonus was earned by the executive while they were alive, establishing their right to receive it. Since the actual payment occurred after their death, this bonus is considered IRD. The estate or beneficiary receiving the bonus will be responsible for including it as income on their tax return and paying the applicable income tax.

• Distributions from Inherited Retirement Accounts: Consider a retired individual who had a traditional Individual Retirement Account (IRA). They pass away, and their adult child is named as the beneficiary of the IRA. When the child begins taking distributions (withdrawals) from this inherited IRA, these distributions are taxable.

  How it illustrates IRD: The money in the traditional IRA would have been taxable income to the deceased parent upon withdrawal. Since the parent died before withdrawing all of it, the distributions taken by the beneficiary are considered IRD. The beneficiary will pay income tax on these distributions as they receive them, just as the parent would have if they had lived to take the withdrawals themselves.

• Installment Sale Payments: Suppose a person sold a rental property to a buyer, agreeing to receive payments over a period of ten years. The seller passes away after receiving the first three annual payments, and the remaining seven payments are subsequently made to their estate or heirs.

  How it illustrates IRD: The deceased seller had a contractual right to receive these installment payments before their death. Since the payments continue to be made after their death to the estate or heirs, those subsequent payments represent IRD. The estate or heirs will report and pay income tax on the portion of each payment that represents taxable gain from the sale, just as the original seller would have done.