Legal Definitions - income in respect of decedent

Income in Respect of 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 they passed away.

Essentially, IRD is income that the deceased individual would have included on their own tax return had they lived to receive it. Because it was earned or accrued before death, it is considered income that "belongs" to the decedent, even though it is received by their estate or a designated beneficiary. The tax rules for IRD ensure that this income is still subject to taxation, typically by the recipient (either the estate or the beneficiary), and retains the same character (e.g., ordinary income, capital gains) it would have had if the deceased person had received it.

• Example 1: Unpaid Salary or Bonus

  Imagine a marketing executive, Ms. Chen, who worked diligently for her company throughout the month of October. She tragically passes away on October 28th. Her company's payroll cycle dictates that salaries for October are paid on November 5th. When the company issues Ms. Chen's final paycheck on November 5th, covering her work through October 28th, this payment is considered IRD.

  Explanation: Ms. Chen earned this salary by performing work before her death. Had she lived, she would have received and reported this income. Since it was paid after her death to her estate or designated beneficiary, it falls under the definition of IRD.

• Example 2: Retirement Account Distributions

  Mr. Davies, aged 75, had a traditional Individual Retirement Account (IRA) and was required to take a minimum distribution (RMD) for the current year. He planned to withdraw the RMD in December but passed away in November before making the withdrawal. His daughter, as the beneficiary of his IRA, receives the RMD payment in January of the following year.

  Explanation: Mr. Davies was legally entitled to and required to take this RMD before his death. Because he died before receiving it, and it was subsequently paid to his beneficiary, this RMD is classified as IRD. The beneficiary will be responsible for reporting it as income.

• Example 3: Uncollected Rental Income

  Mrs. Rodriguez owned a rental property and had a tenant who paid rent on the first of each month. Mrs. Rodriguez passed away on March 25th. The tenant's rent payment for the month of March was due on March 1st but was not received by Mrs. Rodriguez before her death. Her estate subsequently collects this March rent payment from the tenant on April 5th.

  Explanation: The March rent was earned and due to Mrs. Rodriguez for the period she was alive and owned the property. Had she lived, she would have received and reported this income. Since it was collected by her estate after her death, it constitutes IRD.