As we approach the end of 2025, estate planning is on many minds—especially with the federal estate tax exemption set at $13.99 million for individuals (or $27.98 million for married couples). But amid the usual discussions of wills, trusts, and gifting strategies, there's a lesser-known villain that can quietly erode your legacy: Income in Respect of a Decedent (IRD). If you're a high-net-worth individual, business owner, or anyone with significant retirement savings, understanding IRD could save your heirs thousands (or even millions) in taxes.
In this post, we'll break down what IRD is, how it's taxed, the infamous "double taxation" issue, and—most importantly—practical steps to minimize its impact. Whether you're planning your own estate or advising clients, let's dive in.
What Exactly Is Income in Respect of a Decedent (IRD)?
IRD refers to income that a deceased person earned or was entitled to receive during their lifetime but didn't actually get paid until after death. In plain English: It's money you worked for, but the check arrives too late.
Common examples include:
- Unpaid wages, bonuses, or commissions: That year-end bonus you earned but didn't receive before passing.
- Accrued interest or dividends: Declared before death but paid after.
- Deferred compensation: From non-qualified plans like executive bonuses.
- Retirement accounts: Traditional IRAs, 401(k)s, or pensions—especially if no beneficiary is named or if it goes through the estate.
- Ongoing payments from a business or property sale.
IRD doesn't get a "step-up in basis" like stocks or real estate do upon death. Instead, it's treated as if the decedent had received it just before dying—but with some nasty tax twists.
How IRD is Taxed: Not on the Decedent's Final Return
Here's where it gets tricky: IRD isn't reported on the deceased person's final Form 1040. Instead, it's taxed to whoever ultimately receives it—typically the estate (on Form 1041) or the beneficiaries (on their personal 1040).
For instance:
- If the estate collects the IRD, it's income to the estate.
- If it passes directly to heirs (e.g., via a beneficiary designation), the heirs report it as ordinary income.
This income is taxed at the recipient's marginal rate, which could be up to 37% federally in 2025, plus state taxes.
The Double-Taxation Nightmare: Estate Tax + Income Tax on the Same Dollars
IRD's real sting? It can be hit with both estate tax and income tax—potentially eating up over 60% of the value in high-tax scenarios.
Why? IRD is included in the decedent's gross estate for federal estate tax purposes (Form 706), where it's taxed at up to 40% if the estate exceeds the $13.99 million exemption. Then, when the recipient gets the money, they pay income tax on it too.
Example: Suppose a decedent leaves a $2 million traditional IRA as IRD (no beneficiary named, so it goes through the estate). Assuming the estate is taxable:
- Estate tax: 40% on $2M = $800,000 hit.
- Income tax (to beneficiary in 37% bracket): 37% on $2M = $740,000.
- Total tax: $1.54 million—leaving just $460,000 for heirs.
Ouch. And with the estate tax exemption changing in 2026 (new legislation sets it at $15 million permanently), understanding these dynamics remains critical.
Relief from Double Taxation: The §691(c) Deduction
Thankfully, there's partial relief: The recipient can claim an income tax deduction for the estate tax paid on the IRD (under IRC §691(c)). This is a miscellaneous itemized deduction (not subject to the 2% floor) and can be calculated using info from the estate's Form 706 or Schedule K-1.
Continuing the example:
- Estate tax on $2M IRD: $800,000.
- Beneficiary deducts $800,000 on Schedule A.
- Tax savings (at 37%): $296,000.
- Net income tax: $740,000 - $296,000 = $444,000.
- Total tax on $2M: $800,000 (estate) + $444,000 (income) = $1.244 million (62.2% effective rate).
It's better than nothing, but far from a full credit—highlighting why IRD is such a "bad thing" in estate planning.
Smart Planning Strategies to Minimize IRD Taxes
The good news? With proactive financial planning, you can often sidestep or reduce IRD's impact:
- Evaluate Roth conversions: Converting traditional IRAs to Roth accounts during life eliminates IRD issues entirely, since qualified Roth distributions are tax-free to beneficiaries. You pay income tax now (potentially at lower rates), and heirs receive distributions tax-free with no IRD concerns. However, Roth conversions aren't always the right choice—factors like your current tax bracket, time horizon, and estate tax exposure all matter. This strategy works best when you expect beneficiaries to be in higher tax brackets or when your estate will face significant estate taxes.
- Charitable giving: Donate IRD assets (like IRAs) to charity via beneficiary designation—they pay no tax, and you get an estate-tax deduction.
- Life insurance: Use proceeds (tax-free) to offset IRD taxes for heirs.
- Installment planning: If selling a business, structure payments to minimize post-death IRD.
- Review deferred comp: Accelerate payouts if possible, or ensure they're structured efficiently.
As 2025 winds down, now's the time to review your estate for hidden IRD. With the new $15 million exemption taking effect in 2026, strategic planning becomes even more important.
Final Thoughts: Don't Let IRD Derail Your Legacy
IRD might not make headlines, but it's a silent wealth destroyer for unprepared estates. By understanding its rules and planning ahead, you can protect your hard-earned assets for the next generation. If this resonates, consult a certified financial planner or tax advisor—they can run personalized scenarios to quantify the risks.
Have questions about IRD in your plan? Drop a comment below, or contact us for a complimentary estate review. Stay tuned for more insights on navigating estate tax changes!
References
- Internal Revenue Code §691 - Recipients of income in respect of decedents
- Internal Revenue Code §691(c) - Deduction for estate tax attributable to income in respect of a decedent
- Treasury Regulation §1.691(c)-1 - Deduction calculations and examples
- IRS Publication 559 - Survivors, Executors, and Administrators
- Internal Revenue Service, Estate Tax Information (https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax)
- Tax Foundation, "Estate and Inheritance Taxes by State, 2025" (November 2025)
- One Big Beautiful Bill Act (H.R. 1), enacted July 4, 2025
Disclaimer
IMPORTANT: This article is provided for general informational and educational purposes only and does not constitute legal, tax, investment, or financial advice. Tax laws and estate planning regulations are complex and subject to frequent changes. The information presented here is current as of December 2025 and may not reflect the most recent legal developments or changes in federal or state law.
The examples and scenarios described are hypothetical and simplified for illustrative purposes. Actual tax consequences will vary based on individual circumstances, including but not limited to: estate size, income levels, state of residence, beneficiary relationships, timing of distributions, and applicable deductions.
You should not rely on this information as a substitute for professional advice. Before making any estate planning, gifting, or tax-related decisions, you should:
- Consult with a qualified estate planning attorney
- Work with a certified public accountant (CPA) or tax professional
- Engage a certified financial planner (CFP) as appropriate
Individual results may vary. Moddoo Strategy and its representatives do not provide legal or tax advice. This content does not create an attorney-client or advisor-client relationship.
By reading this article, you acknowledge that you understand these limitations and will seek appropriate professional guidance for your specific situation.
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