Income in Respect of a Decedent
Taxpayers are generally required to recognize income for federal income tax purposes in the year in which it is received. If, however, someone dies before receiving income to which he or she is entitled, that income is not included on his or her final income tax return. Instead, such income, referred to as "income in respect of a decedent," or IRD, is included as gross income in the decedent's estate for federal estate tax purposes. And, IRD also becomes taxable income to the person or entity who ultimately receives it (in direct contrast to the general rule that inherited property is not included in an heir's taxable income).
The inclusion of IRD on both the estate tax return (Form 706) and the recipient's income tax return creates the potential for double taxation. Fortunately, to avoid this result, the tax code provides an income tax deduction for any estate tax paid that is attributable to IRD.