I’m often asked whether a person who inherits property has to pay income taxes on that property. In most cases, the answer is no. However, there is one exception: Income in respect of a decedent, also known as IRD.
All income the decedent would have received had death not occurred that was not properly includible on the final return is income in respect of a decedent. Examples include retirement plan assets, IRA distributions, salary, wages, sales commissions, and unpaid interest and dividends. Items of IRD along with other estate assets, are eventually distributed to the beneficiaries of an estate. While most assets in the estate pass to beneficiaries income tax free, the income from IRD assets is generally taxed when the income is actually received by the beneficiary. IRD is taxed to the beneficiary at the beneficiary’s income tax rates. For example, distributions to beneficiaries from IRA’s are income to the beneficiary in the year received from the IRA. However, if a decedent’s estate has paid federal estate taxes on the IRD assets, a beneficiary may be eligible for an IRD tax deduction based on the amount of estate tax paid.
It’s important to remember that though this deduction is available, it won’t apply to you unless you paid estate taxes. For many people, IRD won’t be a factor.
If you’re wondering about IRD, just give us a call. Drazen Law Group attorneys have a thorough understanding of the taxes that come into play during the estate settlement process. We will examine the decedent’s estate tax return to see if the estate paid an estate tax, and then calculate how much of the decedent’s estate tax was attributable to the items of IRD that you inherited. You can then claim this as a deduction on your tax return but only if you itemize and only if you claim the IRD deduction in the same tax year in which you actually received the income.
It’s complicated. But don’t worry. We’ll handle all the details. At Drazen Law Group, we have extensive experience helping clients that have received inherited property , including the IRD. We take great satisfaction in helping our clients keep hard-earned wealth in the hands of the family—instead of passing it on to Uncle Sam. Just give us a call at 203.877.7511.
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