IRD Essentials: Tax Rules, Reporting, and Basis Implications

Do you need to report income in respect of a decedent (IRD) this year? Use this quick test. If you answer “yes” to any item below, you likely have IRD to report:

• Did the decedent earn money before death that no one received until after death?
• Did the estate or beneficiary receive unpaid salary, commissions, bonuses, or deferred pay after the date of death?
• Did you get payments from a sale the decedent made before death (for example, an installment sale)?
• Did you receive taxable distributions from a traditional IRA or other tax-deferred account the decedent owned?
• Did the estate assign you the right to future payments the decedent was owed?

If your answer is “yes,” that income is usually IRD, and the estate and beneficiary may each have to report part of it when they actually receive it.

What counts as IRD and who must report it

Income in Respect of a Decedent (IRD) is unpaid income the decedent had a right to before death but did not receive in time to include on the final return. IRD keeps its tax character, so the way it would have been taxed had the decedent received it still applies.

Key rules:

• Same character rule: If it would have been interest, it’s taxed as interest. If it would have been a capital gain, it’s taxed as a capital gain.
• No step-up in basis: Unlike many inherited capital assets, IRD does not receive a basis step-up at death. The person who receives the income pays tax on the full taxable portion.

Who must report IRD:

• The estate, when the estate receives the income.
• A beneficiary, when the right to the income passes directly to the beneficiary or the estate distributes that right to them.
• Another person who received from the estate the right to collect the income.

According to analysis by VisaVerge.com, the rules draw a clear line: the tax follows the person who actually receives the payment after death.

Yes/no eligibility checklist: What is IRD vs. what is not

Answer “yes” to identify likely IRD items:

• Unpaid paycheck, bonus, or commission owed at death? — Yes, IRD.
• Interest that accrued before death but was paid later? — Yes, IRD.
• Dividends declared before death but paid after? — Often IRD, depending on record date and the decedent’s method of accounting.
• Traditional IRA distributions paid after death? — Yes, IRD when taxable.
• Installment sale payments from a contract the decedent signed before death? — Yes, IRD.

Answer “no” for these common non-IRD items:

• Capital assets (stock or a home) that pass to you and are later sold. — Not IRD; usually they get a step-up in basis to fair market value at death.
• Life insurance paid to a named beneficiary. — Not IRD for income tax purposes (though interest on delayed payouts can be taxable).
• Income already received by the decedent before death. — Not IRD; it belongs on the final return.

Detailed requirements with real examples

• Capital gain IRD:
  • On February 1, George sold his tractor for $3,000, payable March 1. His basis was $2,000.
  • He died on February 15 and never received the money. The $1,000 gain is IRD to whoever receives the payment.
  • If the estate gets it, the estate reports it. If a beneficiary later receives it, the beneficiary reports it. The gain remains a capital gain.
• Salary IRD with assignment to a beneficiary:
  • Cathy was due a large salary at death, payable in five yearly installments.
  • The estate collected the first two installments, then distributed the right to the last three to you.
  • The estate reports the first two installments as IRD when received. You report each of the next three as you get paid.
  • None of these amounts go on Cathy’s final return.
• Retirement account IRD:
  • Traditional IRA distributions paid after death are IRD when taxable.
  • The person who receives them reports the income in the year they receive the distribution.
  • There is no basis step-up for the IRA’s pretax portion.

Disqualifying factors: When you likely do not have IRD to report

You likely do not have IRD if:

• You received only property that is a capital asset (like shares or a home) and did not receive any unpaid income items tied to the decedent’s work, services, or pre-death sales contracts.
• The only payments you received were life insurance proceeds paid directly to you as the named beneficiary.
• All amounts were already included on the decedent’s final income tax return because the decedent actually or constructively received them before death.

If any of these applies, you likely do not have IRD. Still, confirm with the executor to ensure no income rights were distributed to you.

Tax treatment and timing rules that affect you

• Tax when received: IRD is taxed in the year the estate or beneficiary receives the payment.
• No basis step-up: You cannot raise the tax basis for IRD items.
• Same character: IRD retains the same tax type it had to the decedent (wages as wages, interest as interest, capital gain as capital gain).
• Possible deduction for estate tax on IRD: If the executor filed Form 706 and the IRD increased the estate tax, the person who reports the IRD can claim an income tax deduction for the portion of the estate tax attributable to that IRD. This is often called the Section 691(c) deduction.

See IRS Form 706 instructions for details and coordination with the executor. Access the form here: Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.

How to prove you qualify as the proper IRD reporter

Keep documentation to support your reporting:

• Estate’s inventory or accounting showing which items are IRD and who received the rights.
• A distribution letter from the executor if the right to future payments was assigned to you.
• Payment records showing when each installment, dividend, or IRA distribution was actually received and by whom.
• A written 691(c) deduction allocation from the executor if Form 706 was filed and the estate paid tax on IRD.

Common mistakes and how to avoid them

Watch for these errors and avoid them:

• Reporting IRD on the decedent’s final return. Don’t. If the decedent did not receive it before death, it belongs to the estate or the person who later receives it.
• Treating IRD as stepped-up property. Don’t. There is no step-up for IRD items.
• Double-reporting installments when the estate collects some and the beneficiary collects others. Each party reports only what each actually received.
• Missing the estate tax deduction. If Form 706 was filed and estate tax included IRD, the IRD recipient may deduct the related share—coordinate with the executor.

Alternative options if you’re not eligible to report IRD

If you do not receive the income or the right to receive it, you generally cannot report IRD. Possible steps:

• Ask the executor to confirm whether the estate will collect and report the income. If the estate later distributes the right to you, you become the IRD reporter only from that point forward.
• If multiple heirs share the right, request a clear allocation of future payments so each person knows what to report.
• If you expected a payment but did not receive the right, consider whether your share of the estate should include that right. This is a probate and estate administration question, not a tax change.

Steps to improve your outcome and reduce tax drag

• Document early: Keep letters, contracts, and statements that show the decedent’s right to unpaid amounts.
• Match to character: Track the income’s character (wages, interest, capital gain). This helps you report it on the correct lines and consider timing strategies.
• Coordinate timing: If possible and allowed by the payer, align receipt of IRD with a lower-income year to reduce the tax rate you pay. You cannot change the character, but timing can affect your bracket.
• Claim the Section 691(c) deduction when allowed: If estate tax was paid on IRD, make sure you claim the deduction in the year you report the related income.
• Work with the executor: Request a summary that lists each IRD item, who will receive it, expected dates, and the estate tax portion tied to each.

How these rules interact with estates for noncitizens and families abroad

For families with ties outside the United States, IRD rules still apply to U.S.-taxable income. Key points:

• If the decedent had U.S.-source income unpaid at death, the estate or the person who receives it must report it under U.S. rules.
• The character remains the same and there is no step-up.
• Payment timing, withholding, and treaty issues can arise for nonresident beneficiaries; the payer may withhold, and you may need to file a U.S. return to reconcile withholding.
• These are tax reporting points, separate from immigration status.

For an overview of post-death income reporting, see the IRS guide for survivors and executors here: IRS Publication 559: Survivors, Executors, and Administrators.

Quick reference: What you need in hand before filing

From the executor:

• Inventory of IRD items
• Statement on whether Form 706 was filed
• Allocation of any Section 691(c) deduction

From payers:

• Year-end forms for wages, interest, dividends, and IRA distributions
• Installment sale statements

Your records:

• Bank statements showing receipt dates
• Copies of estate distribution letters assigning the right to payments

Summary answers to frequent “Do I qualify?” questions

• I’m the beneficiary and got three remaining salary installments the estate assigned to me. Do I report them? — Yes, IRD when received.
• The estate received two payments before assigning the right to me. Do I report those two? — No. The estate reports those.
• The decedent sold property before death and payment arrived after death. Is the gain IRD? — Yes. The gain is the difference between basis and price.
• I inherited stock and sold it later. Is the gain IRD? — No. It’s usually from a stepped-up basis asset, not IRD.
• Can I deduct estate tax paid on IRD? — Yes, if Form 706 was filed and estate tax included that IRD. Claim the 691(c) deduction.

By first deciding whether the item is IRD and then determining who actually received it, you can answer the core yes/no question and report the amount correctly. The rules are strict but clear: IRD is taxed to the recipient in the year received, keeps its character, does not get a basis step-up, and may allow a deduction if estate tax applied.