Income in Respect of a Decedent (IRD) — Tax on Income a Deceased Person Never Received
Most assets get a step-up in basis at death — the heir inherits the asset at its fair market value on the date of death, and capital gains accumulated during the decedent's lifetime disappear. But there's an important category of assets that doesn't get this step-up: income that the decedent had earned or was entitled to before death but had not yet received or recognized as income. When a beneficiary receives this income — collecting the decedent's last paycheck, withdrawing from an inherited IRA, receiving payments on an installment note the decedent held — they must pay income tax on it just as the decedent would have. This is "income in respect of a decedent" (IRD) under § 691, and it's one of the most significant and often-overlooked tax traps in estate planning. The combination of estate tax and income tax on the same dollars — sometimes called the double tax on IRD — can effectively consume 50-70% of certain inherited assets for heirs of large estates.
Current Law (2026)
| Parameter | Value |
|---|---|
| Core statute | 26 U.S.C. § 691 |
| General rule | IRD items included in gross income of recipient in the year received, just as they would have been for the decedent |
| No step-up in basis | IRD items do NOT receive a step-up in basis under § 1014 — the entire amount received is income |
| IRD deduction (§ 691(c)) | Recipient of IRD may deduct the estate tax attributable to the IRD item on their income tax return — partial relief from double taxation |
| Common IRD items | IRA/401(k) distributions; distributions from tax-deferred annuities; final paycheck and accrued vacation pay; deferred compensation plan payments; installment sale notes held at death; accounts receivable (cash-method businesses); partnership income allocated through date of death but not yet paid |
| Estate tax interaction | If the estate paid estate tax on the IRD asset's value, the recipient gets an income tax deduction equal to the estate tax attributable to the IRD (§ 691(c)) |
| No step-up applies to | IRAs, 401(k)s, 403(b)s, deferred compensation, annuity gains, installment notes, accounts receivable — all IRD |
Legal Authority
- 26 U.S.C. § 691(a)(1) — General rule: IRD items not properly includable in the decedent's final return are included in the gross income of the estate, or the beneficiary who acquires the right to receive the amount, in the year received
- 26 U.S.C. § 691(a)(2) — Transfer of IRD right: if an IRD right is transferred (sold or given away) by the estate or beneficiary, the FMV of the right at the time of transfer is included in their gross income
- 26 U.S.C. § 691(b) — Deductions in respect of a decedent: business deductions and losses the decedent could have taken but didn't (unpaid business expenses at death) are allowed to the estate or beneficiary in the year paid
- 26 U.S.C. § 691(c) — IRD deduction: the recipient of IRD may deduct, for the taxable year they receive the IRD, the estate tax attributable to the net value of all IRD items included in the decedent's gross estate; this deduction partially offsets the double taxation
- 26 U.S.C. § 1014(c) — The step-up exclusion: § 1014's basis step-up to FMV at death does NOT apply to IRD — these assets retain the decedent's original basis (typically zero for IRA/401(k) assets that were never taxed)
What Counts as IRD
Retirement accounts (the biggest IRD category): Every dollar in a traditional IRA, 401(k), 403(b), SEP-IRA, SIMPLE IRA, or similar pre-tax retirement account is IRD. The account's value is included in the gross estate for estate tax purposes AND every distribution from the inherited account is ordinary income to the beneficiary. This double exposure (estate tax + income tax) is the classic IRD trap.
Deferred compensation plans: Amounts deferred under § 457(b) or § 409A nonqualified deferred compensation plans that haven't been distributed before death are IRD. The beneficiary must include distributions in income.
Traditional annuities (the gain portion): The accumulated earnings inside a nonqualified deferred annuity are IRD. The decedent's basis (premiums paid) passes to the beneficiary, and only the gain above basis is IRD — but unlike most inherited assets, there's no step-up.
Installment notes held at death: If the decedent sold property on an installment basis (under § 453) and held the note at death, the unrealized gain in those future payments is IRD. Each payment received by the estate or beneficiary is income in the same proportion as it would have been for the decedent.
Accounts receivable (cash-method businesses): A cash-method business (lawyer, consultant, doctor) records income when received, not when earned. Accounts receivable existing at death — amounts the decedent had earned but not yet collected — are IRD to whoever collects them.
Final paycheck and accrued benefits: Salary, wages, and accrued vacation or sick pay that the employer owes the decedent at death but pays to the estate or a beneficiary are IRD. The recipient pays income tax on these as ordinary income.
What is NOT IRD: Capital gains on appreciated stock, real estate, collectibles, or business interests ARE subject to step-up in basis — the capital gain disappears at death. IRD is limited to income that was already "earned" in an economic sense but not yet taxed.
The IRD Deduction: Relief from Double Taxation
When an IRD item is large enough to be included in a taxable estate (above the $13.61 million federal exemption in 2026), both estate tax and income tax may apply to the same dollars. Congress provided partial relief through the § 691(c) IRD deduction.
How the deduction works: When you receive IRD and include it in your income, you can deduct the portion of the decedent's estate tax that was attributable to the IRD item. This is calculated by:
- Computing the estate tax with all IRD items included
- Computing the estate tax with all IRD items excluded
- The difference = the estate tax attributable to IRD
- You claim a proportionate deduction each year as you receive IRD distributions
The deduction is a miscellaneous deduction but NOT subject to the 2% floor: The § 691(c) deduction is allowed without regard to the TCJA's elimination of miscellaneous itemized deductions. It continues to be deductible even while other miscellaneous deductions were suspended for 2018–2025.
The practical limitation: The IRD deduction only helps if (1) the estate was large enough to owe federal estate tax, and (2) the specific IRD asset was subject to that tax. For most estates below the exemption amount ($13.61M in 2026), there's no federal estate tax and thus no § 691(c) deduction — the beneficiary simply owes income tax on every distribution from inherited retirement accounts with no offset.
How It Affects You
<!-- pria:personalize type="impact" -->If you inherited a traditional IRA, 401(k), or similar pre-tax retirement account: Every dollar you withdraw is ordinary income at your tax rate — no step-up in basis, no long-term capital gains rates, no exclusion. If you inherited $500,000 in a traditional IRA and take it all in one year, that $500,000 is piled on top of your other income. For most beneficiaries, that creates a tax bill of $150,000–$185,000. The SECURE Act (2019) requires most non-spouse beneficiaries to empty inherited IRAs within 10 years — but within that window, you choose the timing. Strategic distribution: if you expect your income to vary significantly over the 10-year period (a year with large business losses, a sabbatical, early retirement), pull more from the inherited IRA in lower-income years. A beneficiary in the 22% bracket distributing evenly over 10 years will pay dramatically less than one in the 37% bracket who takes all $500,000 in year one. Annual Required Minimum Distributions within the 10-year period apply if the original owner had reached RMD age — check with your financial advisor or the custodian on this, as it's where most inherited IRA administration errors occur.
If you're the beneficiary of a large estate that includes both retirement accounts and an estate tax bill: The § 691(c) deduction can partially recover the estate tax paid on IRD. The calculation requires: (1) compute the estate tax attributable to all IRD assets in the estate (by comparing the estate tax with and without them); (2) as you receive IRD distributions over time, deduct a proportionate share of that attributable estate tax each year you receive distributions. Example: a $3 million IRA in a taxable estate generates $1 million in estate tax (on that IRA alone, after exemption). The § 691(c) deduction allows you to deduct that $1 million in estate tax proportionately as you withdraw the $3 million — reducing your effective income tax on the inherited IRA by roughly $220,000–$370,000 over the distribution period (depending on your bracket). This deduction requires careful calculation; the estate's CPA should produce it as part of the estate administration and provide you with the allocated deduction amount. It's a frequently missed deduction.
If you're doing estate planning and have a large traditional IRA: The most powerful tool to eliminate the IRD burden for your heirs is a Roth conversion. Roth IRA balances — because you paid tax on contributions before they went in — are NOT IRD. Roth distributions to heirs are completely tax-free. Each dollar you convert from a traditional IRA to a Roth (paying tax now at your rate) is a dollar your heirs will never owe income tax on. The conversion math works best: in years when your income is lower than usual (early retirement, a business loss year), when you believe tax rates will rise, or when your estate is large enough that heirs would face IRD at very high rates. You can convert any amount in any year — there's no limit. Run the numbers with a financial advisor comparing your current tax rate on conversion versus your heirs' projected rate on distribution (including the 10-year mandatory distribution window). For estates above the federal exemption, Roth conversions also reduce the taxable estate, potentially saving estate tax as well.
If you are the beneficiary of a deceased cash-method professional (doctor, lawyer, dentist, consultant): Accounts receivable that the deceased earned but hadn't yet collected — fees for services rendered, consulting invoices, medical claims awaiting insurance payment — are IRD. The estate collects these receivables, and when it does, that income is taxable to whoever receives the distribution. If the estate passes the receivables to you through a trust distribution with a K-1, you report the IRD as ordinary income on your own return. You cannot step up the basis on these receivables (there's no "basis" in earned-but-uncollected income). If the estate is large enough to owe estate tax, ask the estate attorney about the § 691(c) deduction — the estate tax attributable to the receivables can be partially recovered as a deduction as you report the income.
<!-- /pria:personalize -->State Variations
States generally follow the federal § 691 framework — IRD items are taxable to recipients as ordinary income under state income tax as well. Some states have their own estate/inheritance taxes that can compound the double-taxation problem at the state level. States without state income taxes (Florida, Texas, Nevada) eliminate the state income tax portion of the double taxation, making them relatively attractive states in which to receive large IRD amounts.
Pending Legislation
No major changes to § 691 are pending. The most significant pending legislation affecting IRD is the potential reform of the step-up in basis at death — proposals to impose capital gains tax at death (as if the decedent sold appreciated property) have been discussed in various tax reform proposals. If enacted, such a proposal would significantly expand the concept of IRD by making appreciated assets taxable at death rather than forever escaping the capital gains tax.
Recent Developments
- SECURE Act 10-year rule finalized — IRS clarified RMDs required in years 1-9: After years of uncertainty, the IRS finalized regulations in 2024 confirming that for designated beneficiaries who inherit from decedents who had already begun required minimum distributions (RMDs), the 10-year rule does NOT allow deferring all distributions to year 10 — annual RMDs are still required in years 1 through 9, with the remaining balance due by December 31 of year 10. This clarification increases the IRD acceleration for many inherited IRA beneficiaries compared to what advisors had been recommending during the extended guidance gap. Beneficiaries who relied on the "defer everything to year 10" strategy and are already in year 2+ may need to take corrective distributions.
- OBBBA permanent exclusion changes Roth conversion calculus: The One Big Beautiful Budget Act's permanent estate tax exclusion increase to ~$15M per person has reshaped Roth conversion planning. Roth conversions are IRD-eliminating strategies — converting a traditional IRA to Roth means the owner pays income tax now; heirs receive distributions tax-free (not as IRD). With the OBBBA's higher estate exclusion, the estate tax concern driving some Roth conversions is reduced; the primary motivation for converting is now the income tax burden the IRA will impose on heirs (who face ordinary income rates on distributions) versus the potential income tax rate differential between the owner (who may be in a lower bracket now) and heirs (who may be in higher brackets when the 10-year window forces distributions).
- IRD deduction (§ 691(c)) frequently missed by estate beneficiaries: The IRC § 691(c) deduction — which allows heirs to deduct the estate taxes attributable to IRD items when those items are eventually recognized as income — is one of the most commonly missed deductions in inherited estate situations. The deduction requires calculating the proportionate estate tax allocable to IRD items, which requires the estate tax return. Estate beneficiaries who do not work with advisors familiar with IRD often fail to claim this deduction for years. The IRS's Estate Tax Statistics Unit's data consistently shows that § 691(c) deductions are underreported relative to the theoretical population of estates with significant IRD items. Practitioners who inherit clients from other advisors should audit prior returns for missed § 691(c) deductions within the applicable limitations periods.
- Installment sale obligations and annuity contracts as complex IRD categories: Beyond retirement accounts, installment sale obligations (where a seller receives payments over time) and commercial annuities create IRD issues that can surprise heirs. An installment sale obligation becomes fully accelerated as income when transferred at death under certain circumstances (§ 691(a)(2)); the heir then owes ordinary income tax on the full remaining gain. Annuity contracts (variable annuities with large gains) are IRD-generating assets — the tax-deferred inside buildup in an annuity is IRD subject to ordinary income rates when distributed to a non-spouse beneficiary. Advisors reviewing inherited estates should identify these assets early to plan optimal distribution timing and potential § 691(c) deduction maximization.