This section contains information about the effect of an individual's death on the income tax liability of the survivors (including widows and widowers), the beneficiaries, and the estate.taxmap/pubs/p559-002.htm#en_us_publink100099572
Survivors can qualify for certain benefits when filing their own income tax returns. taxmap/pubs/p559-002.htm#en_us_publink100099573
A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years, as explained under Qualifying widows and widowers, later. taxmap/pubs/p559-002.htm#en_us_publink100099574
If the decedent qualified as your dependent for a part of the year before death, you can claim the exemption for the dependent on your tax return, regardless of when death occurred during the year.
If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit. taxmap/pubs/p559-002.htm#en_us_publink100099575
If your spouse died within the 2 tax years preceding the year for which your return is being filed, you may be eligible to claim the filing status of qualifying widow(er) with dependent child and qualify to use the married-filing-jointly tax rates. taxmap/pubs/p559-002.htm#en_us_publink100099576
Generally, you qualify for this special benefit if you meet all of the following requirements.
- You were entitled to file a joint return with your spouse for the year of death—whether or not you actually filed jointly.
- You did not remarry before the end of the current tax year.
- You have a child, stepchild, or foster child who qualifies as your dependent for the tax year.
- You provide more than half the cost of maintaining your home, which is the principal residence of that child for the entire year except for temporary absences.
William Burns' wife died in 2006. Mr. Burns has not remarried and continued throughout 2007 and 2008 to maintain a home for himself and his dependent child. For 2006, he was entitled to file a joint return for himself and his deceased wife. For 2007 and 2008, he qualifies to file as a qualifying widower with dependent child. For later years, he may qualify to file as a head of household. taxmap/pubs/p559-002.htm#en_us_publink100099578
Check the box on line 5 (Form 1040 or 1040A) under filing status on your tax return. Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income benefits.
The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death. taxmap/pubs/p559-002.htm#en_us_publink100099579
If you are the surviving spouse and a personal representative is handling the estate for the decedent, you should coordinate filing your return for the year of death with this personal representative. See Joint Return, earlier under Final Return for Decedent. taxmap/pubs/p559-002.htm#en_us_publink100099580
All income the decedent would have received had death not occurred that was not properly includible on the final return, discussed earlier, is income in respect of a decedent.
If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), income received after the date of death and before the end of the decedent's tax year (determined without regard to death) is excluded from the recipient's gross income. This exclusion does not apply to certain income. For more information, see Publication 3920.
Income in respect of a decedent must be included in the income of one of the following:
- The decedent's estate, if the estate receives it;
- The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it; or
- Any person to whom the estate properly distributes the right to receive it.
If you have to include income in respect of a decedent in your gross income and an estate tax return (Form 706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. See Estate Tax Deduction, later.
Frank Johnson owned and operated an apple orchard. He used the cash method of accounting. He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. The proceeds from the sale are income in respect of a decedent. When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. When Frank's widow collects the $2,000, she must include that amount in her return. It is not reported on the final return of the decedent or on the return of the estate. taxmap/pubs/p559-002.htm#en_us_publink100099585
Assume the same facts as in Example 1, except that Frank used the accrual method of accounting. The amount accrued from the sale of the apples would be included on his final return. Neither the estate nor the widow would realize income in respect of a decedent when the money is later paid.taxmap/pubs/p559-002.htm#en_us_publink100099586
On February 1, George High, a cash method taxpayer, sold his tractor for $3,000, payable March 1 of the same year. His adjusted basis in the tractor was $2,000. Mr. High died on February 15, before receiving payment. The gain to be reported as income in respect of a decedent is the $1,000 difference between the decedent's basis in the property and the sale proceeds. In other words, the income in respect of a decedent is the gain the decedent would have realized had he lived.taxmap/pubs/p559-002.htm#en_us_publink100099587
Cathy O'Neil was entitled to a large salary payment at the date of her death. The amount was to be paid in five annual installments. The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. The payments are income in respect of a decedent. None of the payments were includible on Cathy's final return. The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them. taxmap/pubs/p559-002.htm#en_us_publink100099588
You inherited the right to receive renewal commissions on life insurance sold by your father before his death. You inherited the right from your mother, who acquired it by bequest from your father. Your mother died before she received all the commissions she had the right to receive, so you received the rest. The commissions are income in respect of a decedent. None of these commissions were includible in your father's final return. The commissions received by your mother were included in her income. The commissions you received are not includible in your mother's income, even on her final return. You must include them in your income. taxmap/pubs/p559-002.htm#en_us_publink100099589
The character of the income you receive in respect of a decedent is the same as it would be to the decedent if he or she were alive. If the income would have been a capital gain to the decedent, it will be a capital gain to you. taxmap/pubs/p559-002.htm#en_us_publink100099590
If you transfer your right to income in respect of a decedent, you must include in your income the greater of:
- The amount you receive for the right or
- The fair market value of the right you transfer.
If you make a gift of such a right, you must include in your income the fair market value of the right at the time of the gift.
If the right to income from an installment obligation is transferred, the amount you must include in income is reduced by the basis of the obligation. See Installment obligations, later. taxmap/pubs/p559-002.htm#en_us_publink100099591
A transfer for this purpose includes a sale, exchange, or other disposition, the satisfaction of an installment obligation at other than face value, or the cancellation of an installment obligation. taxmap/pubs/p559-002.htm#en_us_publink100099592
If the decedent had sold property using the installment method and you collect payments on an installment obligation you acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Include in your income the same profit the decedent would have included had death not occurred. For more information, see Publication 537, Installment Sales.
If you dispose of an installment obligation acquired from a decedent (other than by transfer to the obligor), the rules explained in Publication 537 for figuring gain or loss on the disposition apply to you. taxmap/pubs/p559-002.htm#en_us_publink100099593
A transfer of a right to income, discussed earlier, has occurred if the decedent (seller) had sold property using the installment method and the installment obligation is transferred to the obligor (buyer or person legally obligated to pay the installments). A transfer also occurs if the obligation is canceled either at death or by the estate or person receiving the obligation from the decedent. An obligation that becomes unenforceable is treated as having been canceled.
If such a transfer occurs, the amount included in the income of the transferor (the estate or beneficiary) is the greater of the amount received or the fair market value of the installment obligation at the time of transfer, reduced by the basis of the obligation. The basis of the obligation is the decedent's basis, adjusted for all installment payments received after the decedent's death and before the transfer.
If the decedent and obligor were related persons, the fair market value of the obligation cannot be less than its face value.taxmap/pubs/p559-002.htm#en_us_publink100099594
This section explains and provides examples of some specific types of income in respect of a decedent.taxmap/pubs/p559-002.htm#en_us_publink100099595
The entire amount of wages or other employee compensation earned by the decedent but unpaid at the time of death is income in respect of a decedent. The income is not reduced by any amounts withheld by the employer. If the income is $600 or more, the employer should report it in box 3 of Form 1099-MISC and give the recipient a copy of the form or a similar statement.
Wages paid as income in respect of a decedent are not subject to federal income tax withholding. However, if paid during the calendar year of death, they are subject to withholding for social security and Medicare taxes. These taxes should be included on the decedent's Form W-2 with the taxes withheld before death. These wages are not included in box 1 of Form W-2.
Wages paid as income in respect of a decedent after the year of death generally are not subject to withholding for any federal taxes. taxmap/pubs/p559-002.htm#en_us_publink100099596
A farmer's growing crops and livestock at the date of death normally would not give rise to income in respect of a decedent or income to be included in the final return. However, when a cash method farmer receives rent in the form of crop shares or livestock and owns the crop shares or livestock at the time of death, the rent is income in respect of a decedent and is reported in the year in which the crop shares or livestock are sold or otherwise disposed of. The same treatment applies to crop shares or livestock the decedent had a right to receive as rent at the time of death for economic activities that occurred before death.
If the individual died during a rental period, only the proceeds from the portion of the rental period ending with death are income in respect of a decedent. The proceeds from the portion of the rental period from the day after death to the end of the rental period are income to the estate. Cash rent or crop shares and livestock received as rent and reduced to cash by the decedent are includible in the final return even though the rental period did not end until after death. taxmap/pubs/p559-002.htm#en_us_publink100099597
Alonzo Roberts, who used the cash method of accounting, leased part of his farm for a 1-year period beginning March 1. The rental was one-third of the crop, payable in cash when the crop share is sold at the direction of Roberts. Roberts died on June 30 and was alive during 122 days of the rental period. Seven months later, Roberts' personal representative ordered the crop to be sold and was paid $1,500. Of the $1,500, 122/365, or $501, is income in respect of a decedent. The balance of the $1,500 received by the estate, $999, is income to the estate. taxmap/pubs/p559-002.htm#en_us_publink100099598
If the partner who died had been receiving payments representing a distributive share or guaranteed payment in liquidation of the partner's interest in a partnership, the remaining payments made to the estate or other successor in interest are income in respect of a decedent. The estate or the successor receiving the payments must include them in income when received. Similarly, the estate or other successor in interest receives income in respect of a decedent if amounts are paid by a third person in exchange for the successor's right to the future payments.
For a discussion of partnership rules, see Publication 541, Partnerships.taxmap/pubs/p559-002.htm#en_us_publink100099599
If series EE or series I U.S. savings bonds that were owned by a cash method individual who had chosen to report the interest each year (or by an accrual method individual) are transferred because of death, the increase in value of the bonds (interest earned) in the year of death up to the date of death must be reported on the decedent's final return. The transferee (estate or beneficiary) reports on its return only the interest earned after the date of death.
The redemption values of U.S. savings bonds generally are available from local banks, credit unions, savings and loan institutions, or your nearest Federal Reserve Bank.
You also can get information by writing to the following address.
Bureau of the Public Debt
P.O. Box 1328
Parkersburg, WV 26106-1328
If the bonds transferred because of death were owned by a cash method individual who had not chosen to report the interest each year and had purchased the bonds entirely with personal funds, interest earned before death must be reported in one of the following ways.
- The person (executor, administrator, etc.) who must file the final income tax return of the decedent can elect to include in it all of the interest earned on the bonds before the decedent's death. The transferee (estate or beneficiary) then includes in its return only the interest earned after the date of death.
- If the election in (1), above, was not made, the interest earned to the date of death is income in respect of the decedent and is not included in the decedent's final return. In this case, all of the interest earned before and after the decedent's death is income to the transferee (estate or beneficiary). A transferee who uses the cash method of accounting and who has not chosen to report the interest annually may defer reporting any of it until the bonds are cashed or the date of maturity, whichever is earlier. In the year the interest is reported, the transferee may claim a deduction for any federal estate tax paid that arose because of the part of interest (if any) included in the decedent's estate.
Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. He had bought the bond for $500 and had not chosen to report the increase in value each year. At the date of death, interest of $94 had accrued on the bond, and its value of $594 at date of death was included in your uncle's estate. Your uncle's personal representative did not choose to include the $94 accrued interest in the decedent's final income tax return. You are a cash method taxpayer and do not choose to report the increase in value each year as it is earned. Assuming you cash it when it reaches maturity value of $1,000, you would report $500 interest income (the difference between maturity value of $1,000 and the original cost of $500) in that year. You also are entitled to claim, in that year, a deduction for any federal estate tax resulting from the inclusion in your uncle's estate of the $94 increase in value. taxmap/pubs/p559-002.htm#en_us_publink100099603
If, in Example 1, the personal representative had chosen to include the $94 interest earned on the bond before death in the final income tax return of your uncle, you would report $406 ($500 − $94) as interest when you cashed the bond at maturity. This $406 represents the interest earned after your uncle's death and was not included in his estate, so no deduction for federal estate tax is allowable for this amount. taxmap/pubs/p559-002.htm#en_us_publink100099604
Your uncle died owning series HH bonds that he acquired in exchange for series EE bonds. You were the beneficiary on these bonds. Your uncle used the cash method of accounting and had not chosen to report the increase in redemption price of the series EE bonds each year as it accrued. Your uncle's personal representative made no election to include any interest earned before death in the decedent's final return. Your income in respect of the decedent is the sum of the unreported increase in value of the series EE bonds, which constituted part of the amount paid for series HH bonds, and the interest, if any, payable on the series HH bonds but not received as of the date of the decedent's death. taxmap/pubs/p559-002.htm#en_us_publink100099605
If you receive series EE or series I bonds from an estate in satisfaction of a specific dollar amount legacy and the decedent was a cash method taxpayer who did not elect to report interest each year, only the interest earned after you receive the bonds is your income. The interest earned to the date of death plus any further interest earned to the date of distribution is income to (and reportable by) the estate. taxmap/pubs/p559-002.htm#en_us_publink100099606
When you cash a U.S. savings bond that you acquired from a decedent, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Your Form 1099-INT should show the difference between the amount received and the cost of the bond. The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or, if elected, by the personal representative on the final income tax return of the decedent, or by the estate on the estate's income tax return. Your Form 1099-INT may show more interest than you must include in your income.
You must make an adjustment on your tax return to report the correct amount of interest. Report the total interest shown on Form 1099-INT on your Schedule 1 (Form 1040A) or Schedule B (Form 1040). Enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you did not receive Forms 1099. Show the total interest that was previously reported and subtract it from the subtotal. Identify this adjustment as "U.S. Savings Bond Interest Previously Reported."taxmap/pubs/p559-002.htm#en_us_publink100099607
The interest accrued on U.S. Treasury bonds owned by a cash method taxpayer and redeemable for the payment of federal estate taxes that was not received as of the date of the individual's death is income in respect of a decedent. This interest is not included in the decedent's final income tax return. The estate will treat such interest as taxable income in the tax year received if it chooses to redeem the U.S. Treasury bonds to pay federal estate taxes. If the person entitled to the bonds (by bequest, devise, or inheritance, or because of the death of the individual) receives them, that person will treat the accrued interest as taxable income in the year the interest is received. Interest that accrues on the U.S. Treasury bonds after the owner's death does not represent income in respect of a decedent. The interest, however, is taxable income and must be included in the income of the respective recipients. taxmap/pubs/p559-002.htm#en_us_publink100099608
The interest accrued on savings certificates (redeemable after death without forfeiture of interest) that is for the period from the date of the last interest payment and ending with the date of the decedent's death, but not received as of that date, is income in respect of a decedent. Interest for a period after the decedent's death that becomes payable on the certificates after death is not income in respect of a decedent, but is taxable income includible in the income of the respective recipients. taxmap/pubs/p559-002.htm#en_us_publink100099609
If a beneficiary receives a lump-sum distribution from a traditional IRA he or she inherited, all or some of it may be taxable. The distribution is taxable in the year received as income in respect of a decedent up to the decedent's taxable balance. This is the decedent's balance at the time of death, including unrealized appreciation and income accrued to date of death, minus any basis (nondeductible contributions). Amounts distributed that are more than the decedent's entire IRA balance (includes taxable and nontaxable amounts) at the time of death are the income of the beneficiary.
If the beneficiary of a traditional IRA is the decedent's surviving spouse who properly rolls over the distribution into another traditional IRA, the distribution is not currently taxed. A surviving spouse also can roll over tax free the taxable part of the distribution into a qualified plan, section 403 annuity, or section 457 plan.taxmap/pubs/p559-002.htm#en_us_publink100099610
At the time of his death, Greg owned a traditional IRA. All of the contributions by Greg to the IRA had been deductible contributions. Greg's nephew, Mark, was the sole beneficiary of the IRA. The entire balance of the IRA, including income accruing before and after Greg's death, was distributed to Mark in a lump sum. Mark must include the total amount received in his income. The portion of the lump-sum distribution that equals the amount of the balance in the IRA at Greg's death, including the income earned before death, is income in respect of the decedent. Mark may take a deduction for any federal estate taxes that were paid on that portion.taxmap/pubs/p559-002.htm#en_us_publink100099611
Assume the same facts as in Example 1, except that some of Greg's contributions to the IRA had been nondeductible contributions. To determine the amount to include in income, Mark must subtract the total nondeductible contributions made by Greg from the total amount received (including the income that was earned in the IRA both before and after Greg's death). Income in respect of a decedent is the total amount included in income less the income earned after Greg's death.
For more information on inherited IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).taxmap/pubs/p559-002.htm#en_us_publink100099612
Qualified distributions from a Roth IRA are not subject to tax. A distribution made to a beneficiary or to the Roth IRA owner's estate on or after the date of death is a qualified distribution if it is made after the 5-tax-year period beginning with the first tax year in which a contribution was made to any Roth IRA of the owner.
Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over his or her life or life expectancy. If paid as an annuity, the distributions must begin before the end of the calendar year following the year of death. If the sole beneficiary is the decedent's spouse, the spouse can delay the distributions until the decedent would have reached age 701/2 or can treat the Roth IRA as his or her own Roth IRA.
Part of any distribution to a beneficiary that is not a qualified distribution may be includible in the beneficiary's income. Generally, the part includible is the earnings in the Roth IRA. Earnings attributable to the period ending with the decedent's date of death are income in respect of a decedent. Additional earnings are the income of the beneficiary.
For more information on Roth IRAs, see Publication 590.taxmap/pubs/p559-002.htm#en_us_publink100099613
Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30 or dies, whichever is earlier. The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. If the decedent's estate acquires the interest, see the discussion under Final Return for Decedent, earlier.
The age 30 limitation does not apply if the individual for whom the account was established or the beneficiary that acquires the account is an individual with special needs. This includes an individual who, because of a physical, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education.
If the decedent's spouse or other family member is the designated beneficiary of the decedent's account, the Coverdell ESA becomes that person's Coverdell ESA. It is subject to the rules discussed in Publication 970.
Any other beneficiary (including a spouse or family member who is not the designated beneficiary) must include in income the earnings portion of the distribution. Any balance remaining at the close of the 30-day period is deemed to be distributed at that time. The amount included in income is reduced by any qualified education expenses of the decedent that are paid by the beneficiary within 1 year after the decedent's date of death. An estate tax deduction, discussed later, applies to the amount included in income by a beneficiary other than the decedent's spouse or family member. taxmap/pubs/p559-002.htm#en_us_publink100099615
The treatment of an HSA, Archer MSA, or a Medicare Advantage MSA, at the death of the account holder depends on who acquires the interest in the account. If the decedent's estate acquired the interest, see the discussion under Final Return for Decedent, earlier.
If the decedent's spouse is the designated beneficiary of the account, the account becomes that spouse's Archer MSA. It is subject to the rules discussed in Publication 969.
Any other beneficiary (including a spouse that is not the designated beneficiary) must include in income the fair market value of the assets in the account on the decedent's date of death. This amount must be reported for the beneficiary's tax year that includes the decedent's date of death. The amount included in income is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the decedent's date of death. An estate tax deduction, discussed later, applies to the amount included in income by a beneficiary other than the decedent's spouse. taxmap/pubs/p559-002.htm#en_us_publink100099616
Items such as business expenses, income-producing expenses, interest, and taxes, for which the decedent was liable but that are not properly allowable as deductions on the decedent's final income tax return will be allowed as a deduction to one of the following when paid:
- The estate or
- The person who acquired an interest in the decedent's property (subject to such obligations) because of the decedent's death, if the estate was not liable for the obligation.
Similar treatment is given to the foreign tax credit. A beneficiary who must pay a foreign tax on income in respect of a decedent will be entitled to claim the foreign tax credit. taxmap/pubs/p559-002.htm#en_us_publink100099617
The deduction for percentage depletion is allowable only to the person (estate or beneficiary) who receives income in respect of a decedent to which the deduction relates, whether or not that person receives the property from which the income is derived. An heir who (because of the decedent's death) receives income as a result of the sale of units of mineral by the decedent (who used the cash method) will be entitled to the depletion allowance for that income. If the decedent had not figured the deduction on the basis of percentage depletion, any depletion deduction to which the decedent was entitled at the time of death would be allowable on the decedent's final return, and no depletion deduction in respect of a decedent would be allowed to anyone else.
For more information about depletion, see chapter 9 in Publication 535, Business Expenses.taxmap/pubs/p559-002.htm#en_us_publink100099618
Income that a decedent had a right to receive is included in the decedent's gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary). However, an income tax deduction is allowed to the recipient for the estate tax paid on the income.
The deduction for estate tax can be claimed only for the same tax year in which the income in respect of a decedent must be included in the recipient's income. (This also is true for income in respect of a prior decedent.)
Individuals can claim this deduction only as an itemized deduction on line 28 of Schedule A (Form 1040). This deduction is not subject to the 2% limit on miscellaneous itemized deductions. Estates can claim the deduction on the line provided for the deduction on Form 1041. For the alternative minimum tax computation, the deduction is not included in the itemized deductions that are an adjustment to taxable income.
If income in respect of a decedent is capital gain income, you must reduce the gain, but not below zero, by any deduction for estate tax paid on such gain. This applies in figuring the following:
- The maximum tax on net capital gain (including qualified dividends),
- The 50% exclusion for gain on small business stock, and
- The limitation on capital losses.
To figure a recipient's estate tax deduction, determine:
- The estate tax that qualifies for the deduction and
- The recipient's part of the deductible tax.
The estate tax is the tax on the taxable estate, reduced by any credits allowed. The estate tax qualifying for the deduction is the part of the net value of all the items in the estate that represents income in respect of a decedent. Net value is the excess of the items of income in respect of a decedent over the items of expenses in respect of a decedent. The deductible estate tax is the difference between the actual estate tax and the estate tax determined without including net value. taxmap/pubs/p559-002.htm#en_us_publink100099621
Jack Sage used the cash method of accounting. At the time of his death, he was entitled to receive $12,000 from clients for his services and he had accrued bond interest of $8,000, for a total income in respect of a decedent of $20,000. He also owed $5,000 for business expenses for which his estate is liable. The income and expenses are reported on Jack's estate tax return.
The tax on Jack's estate is $9,460 after credits. The net value of the items included as income in respect of the decedent is $15,000 ($20,000 − $5,000). The estate tax determined without including the $15,000 in the taxable estate is $4,840, after credits. The estate tax that qualifies for the deduction is $4,620 ($9,460 − $4,840). taxmap/pubs/p559-002.htm#en_us_publink100099622
Figure the recipient's part of the deductible estate tax by dividing the estate tax value of the items of income in respect of a decedent included in the recipient's income (the numerator) by the total value of all items included in the estate that represents income in respect of a decedent (the denominator). If the amount included in the recipient's income is less than the estate tax value of the item, use the lesser amount in the numerator. taxmap/pubs/p559-002.htm#en_us_publink100099623
As the beneficiary of Jack's estate (Example 1), you collect the $12,000 accounts receivable from his clients. You will include the $12,000 in your income in the tax year you receive it. If you itemize your deductions in that tax year, you can claim an estate tax deduction of $2,772 figured as follows:
|Value included in your income|| X|
Estate tax qualifying for deduction
|Total value of income in respect of decedent|
If the amount you collected for the accounts receivable was more than $12,000, you would still claim $2,772 as an estate tax deduction because only the $12,000 actually reported on the estate tax return can be used in the above computation. However, if you collected less than the $12,000 reported on the estate tax return, use the smaller amount to figure the estate tax deduction.taxmap/pubs/p559-002.htm#en_us_publink100099624
The estate tax deduction allowed an estate is figured in the same manner as just discussed. However, any income in respect of a decedent received by the estate during the tax year is reduced by any such income that is properly paid, credited, or required to be distributed by the estate to a beneficiary. The beneficiary would include such distributed income in respect of a decedent for figuring the beneficiary's deduction. taxmap/pubs/p559-002.htm#en_us_publink100099625
For the estate tax deduction, an annuity received by a surviving annuitant under a joint and survivor annuity contract is considered income in respect of a decedent. The deceased annuitant must have died after the annuity starting date. You must make a special computation to figure the estate tax deduction for the surviving annuitant. See Regulations section 1.691(d)-1. taxmap/pubs/p559-002.htm#en_us_publink100099626
Property received as a gift, bequest, or inheritance is not included in your income. However, if property you receive in this manner later produces income, such as interest, dividends, or rents, that income is taxable to you. The income from property donated to a trust that is paid, credited, or distributed to you is taxable income to you. If the gift, bequest, or inheritance is the income from property, that income is taxable to you.
If you receive property from a decedent's estate in satisfaction of your right to the income of the estate, it is treated as a bequest or inheritance of income from property. See Distributions to Beneficiaries From an Estate, later. taxmap/pubs/p559-002.htm#en_us_publink100099627
The proceeds from a decedent's life insurance policy paid by reason of his or her death generally are excluded from income. The exclusion applies to any beneficiary, whether a family member or other individual, a corporation, or a partnership. taxmap/pubs/p559-002.htm#en_us_publink100099628
Veterans' insurance proceeds and dividends are not taxable either to the veteran or to the beneficiaries.
Interest on dividends left on deposit with the Department of Veterans Affairs is not taxable. taxmap/pubs/p559-002.htm#en_us_publink100099629
Life insurance proceeds paid to you because of the death of the insured (or because the insured is a member of the U.S. uniformed services who is missing in action) are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds are paid under an accident or health insurance policy or an endowment contract. If the proceeds are received in installments, see the discussion under Insurance received in installments, later. taxmap/pubs/p559-002.htm#en_us_publink100099630
You can exclude from income accelerated death benefits you receive on the life of an insured individual if certain requirements are met. Accelerated death benefits are amounts received under a life insurance contract before the death of the insured. These benefits also include amounts received on the sale or assignment of the contract to a viatical settlement provider. This exclusion applies only if the insured was a terminally ill individual or a chronically ill individual. This exclusion does not apply if the insured is a director, officer, employee, or has a financial interest, in any trade or business carried on by you. taxmap/pubs/p559-002.htm#en_us_publink100099631
A terminally ill individual is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death in 24 months or less from the date of certification. taxmap/pubs/p559-002.htm#en_us_publink100099632
A chronically ill individual
is one who has been certified as one of the following:
- An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to a loss of functional capacity, or
- An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
A certification must have been made by a licensed health care practitioner within the previous 12 months. taxmap/pubs/p559-002.htm#en_us_publink100099633
If the insured was a chronically ill individual, your exclusion of accelerated death benefits is limited to the cost you incurred in providing qualified long-term care services for the insured. In determining the cost incurred, do not include amounts paid or reimbursed by insurance or otherwise. Subject to certain limits, you can exclude payments received on a periodic basis without regard to your costs. taxmap/pubs/p559-002.htm#en_us_publink100099634
If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you are paid is taxable. taxmap/pubs/p559-002.htm#en_us_publink100099635
If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.
To determine the part excluded, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest. taxmap/pubs/p559-002.htm#en_us_publink100099636
If you will receive a specified number of installments under the insurance contract, figure the part of each installment you can exclude by dividing the amount held by the insurance company by the number of installments to which you are entitled. A secondary beneficiary, in case you die before you receive all of the installments, is entitled to the same exclusion. taxmap/pubs/p559-002.htm#en_us_publink100099637
As beneficiary, you choose to receive $40,000 of life insurance proceeds in 10 annual installments of $6,000. Each year, you can exclude from your income $4,000 ($40,000 ÷ 10) as a return of principal. The balance of the installment, $2,000, is taxable as interest income.taxmap/pubs/p559-002.htm#en_us_publink100099638
If each installment you receive under the insurance contract is a specific amount based on a guaranteed rate of interest, but the number of installments you will receive is uncertain, the part of each installment that you can exclude from income is the amount held by the insurance company divided by the number of installments necessary to use up the principal and guaranteed interest in the contract. taxmap/pubs/p559-002.htm#en_us_publink100099639
The face amount of the policy is $200,000, and as beneficiary you choose to receive annual installments of $12,000. The insurer's settlement option guarantees you this amount for 20 years based on a guaranteed rate of interest. It also provides that extra interest may be credited to the principal balance according to the insurer's earnings. The excludable part of each guaranteed installment is $10,000 ($200,000 ÷ 20 years). The balance of each guaranteed installment, $2,000, is interest income to you. The full amount of any additional payment for interest is income to you. taxmap/pubs/p559-002.htm#en_us_publink100099640
If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee. taxmap/pubs/p559-002.htm#en_us_publink100099641
As beneficiary, you choose to receive the $50,000 proceeds from a life insurance contract under a life-income-with- taxmap/pubs/p559-002.htm#en_us_publink100099642
cash-refund option. You are guaranteed $2,700 a year for the rest of your life (which is estimated by use of mortality tables to be 25 years from the insured's death). The actuarial value of the refund feature is $9,000. The amount held by the insurance company, reduced by the value of the guarantee, is $41,000 ($50,000 − $9,000) and the excludable part of each installment representing a return of principal is $1,640 ($41,000 ÷ 25). The remaining $1,060 ($2,700 − $1,640) is interest income to you. If you should die before receiving the entire $50,000, the refund payable to the refund beneficiary is not taxable.
A life insurance contract (including any qualified additional benefits) is a flexible premium life insurance contract if it provides for the payment of one or more premiums that are not fixed by the insurer as to both timing and amount. For a flexible premium contract issued before January 1, 1985, the proceeds paid under the contract because of the death of the insured will be excluded from the recipient's income only if the contract meets the requirements explained under section 101(f) of the Internal Revenue Code. taxmap/pubs/p559-002.htm#en_us_publink100099643
Your basis in property you inherit from a decedent is generally one of the following:
- The FMV of the property at the date of the individual's death;
- The FMV on the alternate valuation date (discussed in the instructions for Form 706), if so elected by the personal representative for the estate;
- The value under the special-use valuation method for real property used in farming or other closely held business (see Special-use valuation, later), if so elected by the personal representative; or
- The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement (discussed in the instructions for Form 706).
If you or your spouse gave appreciated property to an individual during the 1-year period ending on the date of that individual's death and you (or your spouse) later acquired the same property from the decedent, your basis in the property is the same as the decedent's adjusted basis immediately before death. taxmap/pubs/p559-002.htm#en_us_publink100099645
Appreciated property is property that had an FMV greater than its adjusted basis on the day it was transferred to the decedent. taxmap/pubs/p559-002.htm#en_us_publink100099646
If you are a qualified heir and you receive a farm or other closely held business real property from the estate for which the personal representative elected special-use valuation, the property is valued on the basis of its actual use rather than its FMV.
If you are a qualified heir and you buy special-use valuation property from the estate, your basis is the estate's basis (determined under the special-use valuation method) immediately before your purchase increased by any gain recognized by the estate.
You are a qualified heir if you are an ancestor (parent, grandparent, etc.), the spouse, or a lineal descendant (child, grandchild, etc.) of the decedent, a lineal descendant of the decedent's parent or spouse, or the spouse of any of these lineal descendants.
For more information on special-use valuation, see Form 706.taxmap/pubs/p559-002.htm#en_us_publink100099647
Under certain conditions, some or all of the estate tax benefits obtained by using the special-use valuation will be subject to recapture. Generally, an additional estate tax must be paid by the qualified heir if the property is disposed of, or is no longer used for a qualifying purpose within 10 years of the decedent's death.
If you must pay any additional estate (recapture) tax, you can elect to increase your basis in the special-use valuation property to its FMV on the date of the decedent's death (or on the alternate valuation date, if it was elected by the personal representative). If you elect to increase your basis, you must pay interest on the recapture tax for the period from the date 9 months after the decedent's death until the date you pay the recapture tax.
For more information on the recapture tax, see Instructions for Form 706-A.taxmap/pubs/p559-002.htm#en_us_publink100099648
The basis of inherited S corporation stock must be reduced if there is income in respect of a decedent attributable to that stock. taxmap/pubs/p559-002.htm#en_us_publink100099649
Figure the surviving tenant's new basis of property that was jointly owned (joint tenancy or tenancy by the entirety) by adding the surviving tenant's original basis in the property to the value of the part of the property (one of the values described earlier) included in the decedent's estate. Subtract from the sum any deductions for wear and tear, such as depreciation or depletion, allowed to the surviving tenant on that property. taxmap/pubs/p559-002.htm#en_us_publink100099650
Fred and Anne Maple (brother and sister) owned, as joint tenants with right of survivorship, rental property they purchased for $60,000. Anne paid $15,000 of the purchase price and Fred paid $45,000. Under local law, each had a half interest in the income from the property. When Fred died, the FMV of the property was $100,000. Depreciation deductions allowed before Fred's death were $20,000. Anne's basis in the property is $80,000 figured as follows:
|Anne's original basis||$15,000|| |
|Interest acquired from Fred (3/4 of $100,000) ||75,000||$90,000|
|Minus: 1/2 of $20,000 depreciation ||10,000|
One-half of the value of property owned by a decedent and spouse as tenants by the entirety, or as joint tenants with right of survivorship if the decedent and spouse are the only joint tenants, is included in the decedent's gross estate. This is true regardless of how much each contributed toward the purchase price.
Figure the basis for a surviving spouse by adding one-half of the property's cost basis to the value included in the gross estate. Subtract from this sum any deductions for wear and tear, such as depreciation or depletion, allowed on that property to the surviving spouse. taxmap/pubs/p559-002.htm#en_us_publink100099652
Dan and Diane Gilbert owned, as tenants by the entirety, rental property they purchased for $60,000. Dan paid $15,000 of the purchase price and Diane paid $45,000. Under local law, each had a half interest in the income from the property. When Diane died, the FMV of the property was $100,000. Depreciation deductions allowed before Diane's death were $20,000. Dan's basis in the property is $70,000 figured as follows:
|One-half of cost basis (1/2 of |
|Interest acquired from Diane (1/2 of $100,000) ||50,000||$80,000|
|Minus: 1/2 of $20,000 depreciation ||10,000|
See Publication 551, Basis of Assets, for more information on basis. If you and your spouse lived in a community property state, see the discussion in that publication about figuring the basis of your community property after your spouse's death.taxmap/pubs/p559-002.htm#en_us_publink100099654
If you can depreciate property you inherited, you generally must use the modified accelerated cost recovery system (MACRS) to determine depreciation.
For joint interests and qualified joint interests, you must make the following computations to figure depreciation.
- The first computation is for your original basis in the property.
- The second computation is for the inherited part of the property.
Continue depreciating your original basis under the same method you had used in previous years. Depreciate the inherited part using MACRS.
MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). For more information on MACRS, see Publication 946, How To Depreciate Property.taxmap/pubs/p559-002.htm#en_us_publink100099655
If the value or adjusted basis of any property claimed on an income tax return is 150% or more of the amount determined to be the correct amount, there is a substantial valuation misstatement. If the value or adjusted basis is 200% or more of the amount determined to be the correct amount, there is a gross valuation misstatement.taxmap/pubs/p559-002.htm#en_us_publink100099656
A substantial estate or gift tax valuation misstatement occurs when the value of property reported is 65% or less of the actual value of the property. A gross valuation misstatement occurs if any property on a return is valued at 40% or less of the value determined to be correct.taxmap/pubs/p559-002.htm#en_us_publink100099657
If a misstatement results in an underpayment of tax of more than $5,000, an addition to tax of 20% of the underpayment can apply. The penalty increases to 40% if the value or adjusted basis reported is a gross valuation misstatement.
The IRS may waive all or part of the 20% addition to tax (for substantial valuation overstatement) if the following apply:
- The claimed value of the property was based on a qualified appraisal made by a qualified appraiser and
- In addition to obtaining such appraisal, the taxpayer made a good faith investigation of the value of the contributed property.
No waiver is available for the 40% addition to tax (for gross valuation overstatement).
For transitional guidance on the definitions of "qualified appraisal" and "qualified appraiser," see Notice 2006-96, 2006-46 I.R.B. 902, available at www.irs.gov/irb/2006-46_IRB/ar13.html
The definitions apply to appraisals prepared for:
- Donated property for which a deduction of more than $5,000 is claimed and
- Returns filed after August 17, 2006.
If you sell or dispose of inherited property that is a capital asset, you have a long-term gain or loss from property held for more than 1 year, regardless of how long you held the property. taxmap/pubs/p559-002.htm#en_us_publink100099659
Your basis in property distributed in kind by a decedent's estate is the same as the estate's basis immediately before the distribution plus any gain, or minus any loss, recognized by the estate. Property is distributed in kind if it satisfies your right to receive another property or amount, such as the income of the estate or a specific dollar amount. Property distributed in kind generally includes any noncash property you receive from the estate other than the following:
- A specific bequest (unless it must be distributed in more than three installments); or
- Real property, the title to which passes directly to you under local law.
For information on an estate's recognized gain or loss on distributions in kind, see Income To Include
under Income Tax Return of an Estate—Form 1041,
Some other items of income that you, as a survivor or beneficiary, may receive are discussed below. Lump-sum payments you receive as the surviving spouse or beneficiary of a deceased employee may represent:
- Accrued salary payments;
- Distributions from employee profit-sharing, pension, annuity, and stock bonus plans; or
- Other items that should be treated separately for tax purposes.
The treatment of these lump-sum payments depends on what the payments represent.
If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), certain income received by the beneficiary or the estate is not taxable. For more information, see Publication 3920.
Special rules apply to certain amounts received because of the death of a public safety officer (law enforcement officers, fire fighters, chaplains, ambulance crews, and rescue squads).
The provisions for public safety officers apply to a chaplain killed in the line of duty after September 10, 2001, if the chaplain was responding to a fire, rescue, or police emergency as a member or employee of a fire or police department.
The death benefit payable to eligible survivors of public safety officers who die as a result of traumatic injuries sustained in the line of duty is not included in either the beneficiaries' income or the decedent's gross estate. The benefit is administered through the Bureau of Justice Assistance (BJA).
The BJA can pay the eligible survivors an emergency interim benefit up to $3,000 if it determines that a public safety officer's death is one for which a death benefit will probably be paid. If there is no final payment, the recipient of the interim benefit is liable for repayment. However, the BJA may waive all or part of the repayment if it will cause a hardship. If all or part of the repayment is waived, that amount is not included in income. taxmap/pubs/p559-002.htm#en_us_publink100099665
Generally, a survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty is excluded from the recipient's income. The annuity must be provided under a government plan and is excludable to the extent that it is attributable to the officer's service as a public safety officer.
The exclusion does not apply if the recipient's actions were responsible for the officer's death. It also does not apply in the following circumstances.
- The death was caused by the intentional misconduct of the officer or by the officer's intention to cause such death.
- The officer was voluntarily intoxicated at the time of death.
- The officer was performing his or her duties in a grossly negligent manner at the time of death.
Salary or wages paid after the employee's death are usually taxable income to the beneficiary. See Wages, earlier, under Specific Types of Income in Respect of a Decedent.taxmap/pubs/p559-002.htm#en_us_publink100099667
An employee's surviving spouse who receives an eligible rollover distribution may roll it over tax free into an IRA, a qualified plan, a section 403 annuity, or a section 457 plan. For more information, see Publication 575, Pension and Annuity Income, and Form 4972, Tax on Lump-Sum Distributions. taxmap/pubs/p559-002.htm#en_us_publink100099668
A beneficiary other than the employee's surviving spouse may be able to roll over all or part of a distribution from an eligible retirement plan of a deceased employee. The nonspouse beneficiary must be the designated beneficiary of the employee. The distribution must be a direct trustee-to-trustee transfer to your IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. For more information on inherited IRAs, see Publication 590. taxmap/pubs/p559-002.htm#en_us_publink100099669
For beneficiaries who receive pensions and annuities, see Publication 575. For beneficiaries of federal civil service employees or retirees, see Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.taxmap/pubs/p559-002.htm#en_us_publink100099670
If a person other than the decedent's spouse inherits the decedent's traditional IRA or Roth IRA, that person cannot treat the IRA as one established on his or her behalf. If a distribution from a traditional IRA is from contributions that were deducted or from earnings and gains in the IRA, it is fully taxable income. If there were nondeductible contributions, an allocation between taxable and nontaxable income must be made. For information on distributions from a Roth IRA, see the discussion earlier under Income in Respect of a Decedent. The inherited IRA cannot be rolled over into, or receive a rollover from, another IRA. No deduction is allowed for amounts paid into that inherited IRA. For more information about IRAs, see Publication 590. taxmap/pubs/p559-002.htm#en_us_publink100099671
Estates may have to pay federal income tax. Beneficiaries may have to pay tax on their share of estate income. However, there is never a double tax. See Distributions to Beneficiaries From an Estate, later.