December 2000 Bulletin

IRD deduction allowed by IRS in some cases

By Joel M. Blau

It’s no secret that physicians and other high net worth individuals experience the pinch of Uncle Sam’s taxing fingers via some rather unique laws and tax provisions that apply to estate as well as income taxes. While many of these creative tax laws must be addressed proactively during your lifetime, there’s one tax code typically not considered by family members and advisors until after your death.

"Income in respect of a decedent" (IRD) refers to the gross income the decedent would have been entitled to, but which was not included in his taxable income for the year of death.

At the fore of this scenario would be deferred payouts due to receivables from patients and health insurance carriers, and any unpaid salary or bonuses accrued but not yet distributed. Also, most physicians are greatly concerned about the treatment of qualified retirement accounts, including pension plans, profit sharing plans, tax sheltered annuities (TSA) and individual retirement accounts (IRA). In this vein, the IRS has determined that a distribution from a qualified retirement plan is also includable as "IRD" unless a spousal beneficiary elects to treat the decedent’s IRA as his or her own.

Income taxes must still be paid on IRD despite the death of the person who earned it. When preparing the tax return, certain tax offsets are allowed which can reduce the impact of "IRD". Generally, "IRD" must be included in the gross income of the recipient, however a deduction is permitted for estate and generation-skipping transfer taxes paid on the income. The amount of the deduction is determined by computing the federal estate tax with the "IRD" included and then recalculating the tax with the "IRD" excluded. The difference in the two results is the amount of the income tax deduction.

Joel M. Blau, CFP, is president of MEDIQUS Asset Advisors, Inc.

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