What is income in respect of a decedent (IRD)?

IRD is income that the deceased had a right to receive but hadn't received yet at the time of death. Common examples include the final paycheck, accrued vacation pay, distributions from traditional IRAs and 401(k)s, US Savings Bond interest that had accrued but wasn't yet redeemed, deferred compensation, and accounts receivable for self-employed people. IRD is taxable when received by either the estate or the beneficiary.

Do I owe income tax on IRD I receive?

Yes. IRD retains its character as the type of income it originally was -- ordinary income for retirement account distributions, wages for final paychecks, interest for accrued bond interest. You report it on your personal tax return in the year you receive it, and it's taxed at your normal rates. Unlike most inherited assets, IRD does not get a stepped-up basis, so you can't avoid the tax by selling.

What's the difference between IRD and a regular inheritance?

Regular inherited assets (a house, a brokerage account, a checking account balance) generally come to you tax-free at receipt -- the principal isn't taxable income, and most assets get a stepped-up basis. IRD is different: it's income that the deceased earned but hadn't been taxed on yet. The IRS still wants its tax, so whoever receives the income pays the tax. The most common example: a traditional 401(k) you inherit is essentially all IRD because the deceased never paid tax on those contributions.

Can I avoid the tax on IRD?

Not entirely, but you can manage the timing and reduce the bite. For retirement accounts, spreading distributions over multiple years (within the 10-year window for non-spouse beneficiaries) keeps you in lower tax brackets. The IRD deduction (federal Section 691(c)) gives you a deduction for any federal estate tax attributable to the IRD, though most estates are below the federal exemption and don't pay estate tax. For savings bonds, the executor can choose to include accrued interest on the deceased's final 1040 instead of passing it to beneficiaries.

What is the IRD deduction?

If the estate paid federal estate tax (which only applies to estates over about $14 million in 2026), the beneficiary who receives IRD can claim a Section 691(c) miscellaneous itemized deduction on their tax return for the portion of estate tax attributable to that IRD. The deduction prevents double taxation -- without it, IRD would be taxed once for estate tax and again for income tax. Most beneficiaries never need this deduction because most estates don't pay federal estate tax.

Should I take a lump sum from an inherited IRA to get the IRD over with?

Almost never. Taking a lump sum bunches a large amount of IRD into a single tax year, pushing you into top tax brackets and creating a massive tax bill. For a $400,000 inherited IRA, a lump-sum withdrawal could mean $150,000+ in combined federal and state tax. Spreading the distributions over the full 10 years allowed under the SECURE Act usually cuts the total tax bill substantially.

Income in Respect of Decedent (IRD): Tax Rules Explained (2026)

What IRD Is and Why It Matters

When someone dies, most of what they leave behind comes to heirs essentially tax-free. The principal of a bank account, the value of a house, the shares in a brokerage account -- none of these are taxable income to the heir. The deceased paid income tax during their life; you inherit what's left over.

Income in respect of a decedent (IRD) breaks that pattern. IRD is income the deceased had earned but hadn't received yet at the time of death. The deceased never paid income tax on it because they hadn't received it. The IRS still wants its tax. So whoever receives the income -- the estate, or the beneficiary -- pays the tax.

The most common categories of IRD:

Distributions from traditional IRAs, 401(k)s, and other pre-tax retirement accounts -- The deceased got a tax deduction for contributing; the income tax was deferred. Distributions are always ordinary income to whoever receives them.
The deceased's final paycheck or accrued vacation pay received after death
Accrued interest on Series EE and I Savings Bonds the deceased held but hadn't redeemed
Deferred compensation from a past employer that pays out at or after death
Royalties from past work that come in after death
Accounts receivable for self-employed people -- invoices billed but not collected before death
Installment sale payments that were due to the deceased

Each of these is taxable income when received. The character of the income (ordinary income, capital gain, interest) carries through to whoever receives it.

The Stepped-Up Basis Doesn't Apply to IRD

This is the critical insight that catches heirs off guard. Most inherited assets get a "stepped-up basis" -- their cost basis for tax purposes resets to the fair market value on the date of death. If your parent bought a stock at $20 and it was worth $100 at death, your basis is $100 -- and if you sell at $110, you only pay tax on $10 of gain.

IRD does not get a stepped-up basis. The full income is taxable to whoever receives it, with no basis adjustment. This is why a $400,000 traditional 401(k) inherited from a parent is fundamentally different from a $400,000 brokerage account inherited from a parent:

Brokerage account ($400,000): Stepped-up basis means little or no immediate tax. You can sell some or all of the holdings with minimal tax impact and put the cash wherever you want.
Traditional 401(k) ($400,000): Every dollar you withdraw is taxable income. Withdrawing all $400,000 in one year could cost $150,000+ in federal and state income tax.

The same dollar amount of inherited "wealth" can carry vastly different tax consequences depending on whether it's IRD or non-IRD.

Who Pays the Tax: Estate, Beneficiary, or Both?

IRD is taxable to whoever actually receives it.

When the Estate Receives It

If the income is paid to the estate (for example, a final paycheck mailed to the deceased's address after death), the estate reports the income on its own income tax return (Form 1041). The estate may then deduct it (through the "distribution deduction") if it distributes the income to beneficiaries during the year, with the beneficiaries reporting the income on their own returns via Schedule K-1.

See our guide to Form 1041 for the mechanics of how the estate reports and deducts distributed income.

When the Beneficiary Receives It Directly

If the income goes directly to a named beneficiary (for example, an inherited IRA distribution to a beneficiary named on the IRA account), the beneficiary reports it on their personal tax return.

Practical Implications

For inherited IRAs and 401(k)s with named beneficiaries, the IRD goes directly to the beneficiaries and never touches the estate. Each beneficiary pays tax at their personal rate as they take distributions.

For income that goes through the estate (final paychecks, accounts receivable, royalties), the executor has some control. The estate can pay tax itself or distribute the income to beneficiaries -- and the choice can save substantial money because:

Estate tax brackets are compressed. Estates hit the top 37% federal bracket at just $15,200 of taxable income (2026 brackets). Individuals don't hit 37% until $609,350.
Distributing IRD to beneficiaries in lower tax brackets shifts the tax to lower rates.

The executor should generally distribute IRD income to beneficiaries each year to take advantage of the beneficiaries' lower personal brackets.

The IRD Deduction (Section 691(c))

If the estate pays federal estate tax, beneficiaries who receive IRD get a partial offset. Under Section 691(c) of the Internal Revenue Code, the beneficiary can deduct the portion of federal estate tax attributable to the IRD when calculating their income tax.

How It Works

If federal estate tax was paid on an estate and the estate includes IRD:

Calculate what percentage of the total estate's taxable value came from IRD
Multiply the total federal estate tax by that percentage
That dollar amount becomes a deduction for the beneficiary in the year they receive (and pay tax on) the IRD

Example:

Estate's total taxable value: $20,000,000
Of that, $4,000,000 is IRD (e.g., from a large traditional IRA)
Federal estate tax paid: $2,400,000 (40% of the amount over the exemption)
IRD portion of estate tax: $480,000 (calculated based on the $4M IRD share)
Beneficiary of the inherited IRA takes distributions over 10 years totaling $4,000,000
Each year, the beneficiary can deduct a proportionate share of the $480,000 from their income

When This Matters

The IRD deduction only applies when federal estate tax was actually paid. The federal estate tax exemption in 2026 is about $14 million per person (or $28 million for a married couple's combined estate). Most estates -- well under 1% nationally -- pay any federal estate tax at all. For 99%+ of estates, the IRD deduction is irrelevant.

State estate tax (which a handful of states impose) does not trigger the federal IRD deduction. Some states allow a similar deduction for state estate tax paid; most don't.

Common IRD Situations and How to Handle Them

Inherited Traditional IRA or 401(k)

The largest source of IRD for most families. Strategies:

Spread distributions over the available window. Under the SECURE Act, most non-spouse beneficiaries must empty an inherited IRA within 10 years. Spreading $400,000 over 10 years at $40,000/year keeps you in lower brackets than taking $400,000 in one year. See inherited IRA rules in 2026.
Coordinate with your other income. Take larger distributions in low-income years (retirement, sabbatical, between jobs) and smaller distributions in high-income years.
Spousal options for surviving spouses. A spouse who rolls an inherited IRA into their own IRA defers RMDs until their own required beginning date, often extending the tax deferral by decades.

Final Paycheck

When the deceased's employer issues the final paycheck after death:

If paid to the surviving spouse: Reported on the spouse's W-2 if the employer treats them as the recipient
If paid to the estate: Reported on the estate's Form 1041
Either way: Taxable as ordinary income to whoever receives it

The deceased's name is on the W-2 for wages earned during life; the post-death portion is IRD reported to the recipient.

Accrued Vacation Pay

Treated like a final paycheck. Taxable as ordinary income to whoever receives it.

Series EE and I Savings Bonds

Accrued interest on savings bonds is IRD if the deceased had been deferring interest recognition (most owners do this until the bonds mature or are cashed). When the bonds are redeemed:

The accrued interest is IRD income
The recipient reports it as interest income
The executor has a one-time election to include all accrued interest on the deceased's final 1040 instead

See our savings bonds after death guide for the detailed mechanics of the election.

Royalties

Royalty payments owed to the deceased for past work (books, music, patents) that come in after death are IRD. Reported as ordinary income (or in some cases as portfolio income) by the recipient.

Self-Employed Accounts Receivable

For self-employed individuals (sole proprietors, single-member LLCs, independent contractors), invoices billed before death but collected after are IRD. The estate or beneficiary reports the income when received.

Deferred Compensation

Payments under deferred compensation plans (executive nonqualified plans, severance plans with deferred payouts) that pay out at or after death are IRD. Taxable when received.

Installment Sale Payments

If the deceased had sold an asset under an installment plan (receiving payments over time), payments received after death are partly IRD (the unrecognized gain portion) and partly return of principal (not taxable).

Strategies to Minimize IRD Tax

1. Spread Out Retirement Account Distributions

The biggest single move you can make. For inherited traditional IRAs and 401(k)s, spreading distributions over the maximum allowable period (10 years for most non-spouse beneficiaries) keeps you in lower brackets.

2. Time Distributions for Low-Income Years

If you have flexibility on when to take inherited IRA distributions within the 10-year window, take more in years when your other income is low. Bunching distributions in high-income years wastes the bracket arbitrage opportunity.

3. Use the Estate's Distribution Deduction Strategically

For IRD that flows through the estate (not directly to named beneficiaries), the executor can manage timing through the distribution deduction. Distribute IRD to beneficiaries in years when they're in low brackets; retain in the estate in years when beneficiaries are in high brackets and the estate has its own deductions to offset the income.

4. Consider a Roth Conversion of the Deceased's Pre-Tax Assets

This option isn't usually available for inherited IRAs (you can't convert an inherited traditional IRA to a Roth, with limited exceptions for spouses), but for a surviving spouse who rolls an inherited IRA into their own IRA, Roth conversion may be worth considering as part of their broader tax planning.

5. Take Advantage of Lower Income Years for Roth Conversions

For surviving spouses or for the deceased's own pre-death Roth conversion planning, low-income years (retirement, gap years between jobs) are good for Roth conversions that move pre-tax money to Roth at lower brackets.

6. Donate IRD to Charity

If you're charitably inclined, IRD income is often a tax-efficient asset to donate. You take a charitable deduction equal to the donation, offsetting the IRD income. This is especially valuable if the IRD would push you into high tax brackets.

For inherited IRAs, qualified charitable distributions (QCDs) let you direct IRA distributions directly to charity, satisfying RMDs and avoiding income tax recognition on the donated amount.

Common Mistakes With IRD

Taking a lump sum from an inherited IRA. Concentrates IRD in one tax year, pushing you into top brackets.
Not realizing certain inheritances are IRD. Many heirs assume inherited assets are tax-free. Retirement accounts, in particular, are essentially all IRD.
Forgetting the IRD deduction when estate tax was paid. For large estates, the Section 691(c) deduction can save substantial money. Don't miss it.
Treating IRD as if it has a stepped-up basis. It doesn't. There's no "free" appreciation to be captured.
Not coordinating IRD timing with other income. A retirement-age beneficiary who can defer IRD into retirement years (lower bracket) saves much more than one who bunches it into peak-earning years.

How SwiftProbate Can Help

IRD is one of the most overlooked tax concepts in estate inheritance. SwiftProbate's checklist prompts you to identify potential IRD as part of the asset inventory -- inherited retirement accounts, deferred compensation, accrued savings bond interest, and uncollected receivables for self-employed deceased. Flagging these early gives you time to plan distributions strategically rather than scrambling at tax time.

This article is for informational purposes only and is not legal or tax advice. Consult a qualified attorney, CPA, or financial planner for guidance specific to your situation.

Income in Respect of a Decedent (IRD): The Tax Trap Most Heirs Don't See Coming