IRD
Income in Respect of a Decedent (IRD) is income that the deceased was entitled to but had not yet received before death. Taxable to the recipient (heir, estate, or trust) at ordinary rates as the right to receive transfers — without the §1014 step-up basis treatment that applies to capital assets. Common examples: traditional (pre-tax) retirement-account balances, deferred compensation, accrued bond interest.
IRD is the structural exception to the step-up-at-death rule. Capital assets — taxable brokerage securities, real estate, business interests — receive a §1014 basis step-up at death, eliminating the appreciation as a future taxable event. IRD assets do NOT step up. The income that was taxable to the decedent but had not yet been recognized passes to the heir intact — taxable at ordinary rates when received.
The largest IRD category for most households is pre-tax retirement accounts (Traditional IRA, 401(k), 403(b)). The pre-tax balance represents income the decedent had earned but deferred via the tax-advantaged account; that income is owed to the IRS. When the heir inherits the IRA, distributions remain ordinary income — taxable at the heir's marginal rate when received.
Deferred compensation arrangements (NQDC plans, deferred bonus arrangements) are IRD when the decedent had earned the deferred amounts but not yet received them. The deferred amount transfers as IRD; the eventual payout to the heir is ordinary income, just as it would have been to the decedent. Stock option grants present a wrinkle — vested-but-unexercised options are typically IRD; the bargain element on eventual exercise is ordinary income to the heir.
The §691(c) IRD deduction provides partial relief: when the decedent's estate paid federal estate tax, the heir can deduct a portion of that estate tax on the income tax return when reporting IRD income. The deduction is allocated to the IRD source; for example, an heir reporting $200k of IRA distribution as IRD with $80k of attributable estate tax can claim a $80k itemized deduction. This relief is rarely material because estate-tax-paying estates are uncommon under post-TCJA exemption levels.
| Capital asset (§1014 step-up) | IRD (no step-up) | |
|---|---|---|
| Examples | Taxable brokerage, real estate | Pre-tax IRA, NQDC, accrued bond interest |
| Heir's basis | FMV at date of death | Carryover (none for accrual items) |
| Tax on subsequent disposition | LT capital gain on appreciation post-DOD | Ordinary income at heir's rate |
| §691(c) deduction available | No (no IRD) | Yes (when estate tax paid) |
| 10-year SECURE rule applies | No | Yes (for inherited retirement accounts) |
Synthetic households at death-event milestones should track IRD assets separately from §1014-step-up capital assets. Pre-tax IRA, 401(k), and similar retirement-account balances should remain taxable to heirs; distribution events should generate ordinary-income tax. The §691(c) deduction should be available where federal estate tax was paid.
Common pitfalls
- Treating inherited Traditional IRA distributions as tax-free — they are NOT (ordinary income to heir).
- Forgetting that step-up applies only to capital assets — IRD specifically excluded.
- Missing the §691(c) IRD deduction when applicable — under-claimed at most retail estates.
- Confusing 'tax-free' inherited Roth distributions (which apply for §1014-equivalent reasons) with 'tax-free' inherited Traditional distributions (which don't apply, because Traditional is pre-tax IRD).
Examples
Decedent dies with $1M pre-tax Traditional IRA. Heir inherits. Under SECURE Act 10-year rule, heir must drain the account by year 10. Each distribution is fully taxable as ordinary income to the heir — no basis step-up, no §1014 elimination. If heir is in 32% bracket and takes the full $1M over 10 years: federal tax owed ~$320k (plus state). The Traditional IRA's pre-tax character is the entire IRD framework — the income was already deferred, and it's taxable when finally distributed.