Calculating an IRD Deduction in 5 Easy Steps

| September 22, 2017
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What is an IRD deduction?

An IRD (Income in Respect of a Decedent) deduction is a way of offsetting the impact of double taxation on federal estate tax and income tax on certain inherited assets. It is an income tax deduction for the beneficiary (miscellaneous itemized deduction, not subject to limitations).

When Should You Look for an IRD?

When an individual receives a 1099-R for a distribution that has code 4 (the death code) in Box 7. Be watchful and proactive with this! In the tax time crunch this is an easily overlooked item.

1. Find out the amount of federal estate tax paid by the decedent. It’s listed on page 1 of the decedent’s estate tax return, Form 706.

2. Create an imaginary estate tax return that assumes no IRA. You’ll need an estate tax planning software program to do it. Plug in the value of the estate after subtracting the value of the IRA. This will tell you what the federal estate tax would have been if there were no IRA in the estate.

3. Subtract the imaginary federal estate tax as if there were no IRA (figured in step 2) from the federal estate actually paid (in step 1). That result is the amount of the IRD deduction.

4. Divide the IRD deduction (from step 3) by the amount of the IRA included in the estate. This will give you the percentage of the deduction you (the beneficiary) will be able to claim at each withdrawal from the inherited IRA.

5. Multiply the amount of the IRA distribution you took during the year by the percentage in step 4 to get the amount of your annual IRD deduction. You cannot claim this deduction in a year that you did not withdraw from the inherited IRA.

Copyright © 2017 IRA Help, LLC

Reprinted with permission.

IRA Help, LLC takes no responsibility for the current accuracy of this information.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Sage Path Solutions does not provide tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

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