Tax Strategies & Credits

Estate Taxes 101: One of the Most Overlooked Tax Deductions

by
Tera Kovanes
on
4/20/2016
Estate Taxes 101: One of the Most Overlooked Tax Deductions

In most cases, the value of the individual's total property and assets is calculated to determine whether it is more or less than the $5.45 million lifetime estate tax exclusion. If it falls under, then there is no tax impact. If the total that exceeds the exclusion, then prior taxable gifts are subtracted from the overage, and that amount is subject to estate tax.  

If the estate includes items such as uncollected business income, traditional IRAs, or accrued bond interest, these items may be taxable to both the estate and the named beneficiaries, creating a double taxation. This double taxation is known as an IRD, or income in respect of a decedent, and those who find themselves facing this tax are frequently unaware that they are able to take a tax deduction.

What is an IRD?

An IRD, or income in respect of a decedent, is an asset that the deceased person was entitled to but did not receive before they died. It is considered taxable income for the estate. In most cases the property that makes up a deceased person's estate, and a beneficiary's inheritance, is not taxable to the estate, but in instances such as a final paycheck that the decedent did not receive, it would be.

This type of asset does not get the benefit of the “step-up” that the majority of the decedent's assets do: as a result, it ends up being subject to taxes for both the estate and the person who inherits it. When this happens, the beneficiary is able to claim the IRD deduction.

How Can You Tell if an Asset is Eligible for the IRD Deduction?

Unfortunately, when a beneficiary inherits an asset that is taxable to both them and the estate, the event does not trigger any kind of notification that they are eligible to file for the IRD deduction. It is the responsibility of the beneficiary to recognize when an asset that they have inherited is an IRD, and as a result, people often end up paying more in taxes then they need to. 

There are a couple of things that a beneficiary can look for to provide them with a heads up that they need to look into this matter further. One is receipt of a Form 199-R or Schedule K-1 f with taxable income from the estate. If you receive this, it is incumbent upon you to ask whether the estate filed a Form 706 Estate Tax Return, and if the result was that the estate had to pay taxes on the asset.

If that was the case then you should request a copy of the form to use as part of the necessary documentation, and consult an experienced tax professional regarding applying for the IRD deduction. 

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Tera Kovanes

Tera Kovanes

Tera D. Kovanes, CPA is a Certified Public Accountant (CPA) practice based in Henrico, Virginia. She can assist you with your tax preparation, planning, accounting, payroll and bookkeeping needs. She specializes in outsourced or part-time CFO work. In addition to being a CPA, she also is a Certified Fraud Examiner.

Tera D. Kovanes, CPA
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Virginia

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