Publication 559
taxmap/pubs/p559-002.htm#en_us_publink100099571Discussed below is 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_publink100099572Survivors can qualify for certain benefits when filing their
own income tax returns.
taxmap/pubs/p559-002.htm#en_us_publink100099573A 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_publink100099574If 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. To determine if you
qualify for the child tax credit, see the instructions for Form 1040, line 51;
Form 1040A, line 33; or Form 1040NR, line 48. To determine if you qualify for
the earned income credit, see the instructions for Form 1040, lines 64a and 64b
or Form 1040A, lines 41a and 41b.
taxmap/pubs/p559-002.htm#en_us_publink100099575If 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_publink100099576Generally, 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 2008. Mr. Burns has not remarried
and continued throughout 2009 and 2010 to maintain a home for himself and his
dependent child. For 2008, he was entitled to file a joint return for himself
and his deceased wife. For 2009 and 2010, 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_publink100099578Check 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_publink100099579If 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 under
Final Income Tax Return for Decedent—Form 1040, earlier.
taxmap/pubs/p559-002.htm#en_us_publink100099580All 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. |
taxmap/pubs/p559-002.htm#en_us_publink100099582Income 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.
- 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. |
taxmap/pubs/p559-002.htm#en_us_publink100099584Example 1.(p9)
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_publink100099585Example 2.(p9)
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_publink100099586Example 3.(p9)
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_publink100099587Example 4.(p9)
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_publink100099588Example 5.(p9)
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_publink100099589The 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_publink100099590If 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_publink100099591A 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_publink100099592If 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_publink100099593A transfer of a right to income, discussed above, has occurred
if the decedent (seller) sold property using the installment method and the
installment obligation was transferred to the obligor (buyer or person legally
obligated to pay the installments). A transfer also occurs if the obligation was
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_publink100099594This section explains and provides examples of some specific
types of income in respect of a decedent.
taxmap/pubs/p559-002.htm#en_us_publink100099595The 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, Miscellaneous Income, 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 along 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_publink100099596A 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 that 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 part of the rental period ending with death are income in respect of a
decedent. The proceeds from 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 on
the final return even though the rental period did not end until after death.
taxmap/pubs/p559-002.htm#en_us_publink100099597Alonzo 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_publink100099598If 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_publink100099599If series EE or series I U.S. savings bonds 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 chosen not 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 on 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
chosen not 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 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 on 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_publink100099603If, 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_publink100099604Your uncle died owning series HH bonds 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 on 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_publink100099605If a beneficiary receives 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 receipt of the bonds is income to the beneficiary. 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_publink100099606When 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 B (Form 1040A or 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_publink100099607The 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_publink100099608The interest accrued on savings certificates (redeemable after
death without forfeiture of interest) 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_publink100099609If 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. Also, a surviving spouse can roll over
tax free the taxable part of the distribution into a qualified plan, section 403
annuity, or section 457 plan.
For more information on inherited IRAs, see Publication 590,
Individual Retirement Arrangements (IRAs).
taxmap/pubs/p559-002.htm#en_us_publink100099612Qualified 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_publink100099613Generally, 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 Income Tax Return for Decedent—Form 1040, 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 one 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_publink100099615The 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 Income Tax Return for Decedent—Form 1040, 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
paid by the beneficiary within one 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_publink100099616Items 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_publink100099617The 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 is allowable on the decedent's final return, and no depletion
deduction in respect of a decedent is allowed to anyone else.
For more information about depletion, see chapter 9 in Publication
535, Business Expenses.
taxmap/pubs/p559-002.htm#en_us_publink100099618Income 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 only be claimed 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 as an itemized deduction that is
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.
- 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_publink100099621Jack 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_publink100099622Figure 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_publink100099623As 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 |
| |
$12,000
|
X
|
$4,620
|
=
|
$2,772
|
| | $20,000 |
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_publink100099624The estate tax deduction allowed to an estate is figured in the
same manner discussed above. However, any income in respect of a decedent
received by the estate during the tax year is reduced by any such income
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 estate tax deduction.
taxmap/pubs/p559-002.htm#en_us_publink100099625For 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_publink100099626Property 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_publink100099627The 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_publink100099628Veterans' 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_publink100099629Life insurance proceeds paid to a beneficiary 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 the recipient 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_publink100099630A beneficiary can exclude from income accelerated death benefits
received 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 the beneficiary.
taxmap/pubs/p559-002.htm#en_us_publink100099631A
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_publink100099632A
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.
- 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, exclusion of accelerated death
benefits is limited to the cost 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,
exclude payments received on a periodic basis without regard to costs.
taxmap/pubs/p559-002.htm#en_us_publink100099634If an insurance company pays interest only on proceeds from life
insurance left on deposit, the interest is taxable.
taxmap/pubs/p559-002.htm#en_us_publink100099635If a beneficiary receives life insurance proceeds in installments,
he or she can exclude part of each installment from 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 income as interest.
taxmap/pubs/p559-002.htm#en_us_publink100099636If a beneficiary will receive a specified number of installments
under the insurance contract, figure the part of each installment he or she can
exclude by dividing the amount held by the insurance company by the number of
installments to which he or she is entitled. In case he or she dies before
receiving all the installments, a secondary beneficiary is entitled to the same
exclusion.
taxmap/pubs/p559-002.htm#en_us_publink100099637As beneficiary, you choose to receive $100,000 of life insurance
proceeds in 10 annual installments of $11,000. Each year, you can exclude from
your income $10,000 ($100,000 ÷ 10) as a return of principal. The balance
of the installment, $1,000, is taxable as interest income.
taxmap/pubs/p559-002.htm#en_us_publink100099638If each installment received under the insurance contract is
a specific amount based on a guaranteed rate of interest, but the number of
installments that will be received is uncertain, the part of each installment
excluded 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_publink100099639The 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_publink100099640If the beneficiary under an insurance contract is entitled to
receive the proceeds in installments for the rest of his or her life without a
refund or period-certain guarantee, the excluded part of each installment can be
determined by dividing the amount held by the insurance company by his or her
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_publink100099641As beneficiary, you choose to receive the $50,000 proceeds from
a life insurance contract under a life-income-with-
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.
taxmap/pubs/p559-002.htm#en_us_publink100099642A 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_publink100099643Note.See the
Caution under the
Introduction section on page 2 of this publication.
Your basis in property you inherit from a decedent is generally
one of the following.
- The FMV of the property on 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 you.
- 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 you as the personal representative so elect.
- 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_publink100099645Appreciated 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_publink100099646If 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_publink100099647Under 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 beginning 9 months
after the decedent's death until the date you pay the recapture tax.
For more information on the recapture tax, see the Instructions
for Form 706-A, U.S. Additional Estate Tax Return.
taxmap/pubs/p559-002.htm#en_us_publink100099648The 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_publink100099649Figure the surviving tenant's new basis of jointly-owned property
(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_publink100099650Fred 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 |
| Anne's basis | $80,000 |
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_publink100099652Dan 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
$60,000)
| $30,000 | |
| Interest acquired from Diane (1/2 of $100,000)
| 50,000 | $80,000 |
| Minus:
1/2 of $20,000 depreciation
| 10,000 |
| Dan's basis | $70,000 |
See Publication 551, Basis of Assets, for more information on
basis. If the decedent and his or her spouse lived in a community property
state, see the discussion in that publication about figuring the basis of
community property after a spouse's death.
taxmap/pubs/p559-002.htm#en_us_publink100099654If a beneficiary can depreciate inherited property, the modified
accelerated cost recovery system (MACRS) must be used to determine depreciation.
For joint interests and qualified joint interests, use the following
computations to figure depreciation.
- The first computation is for the original basis in the property.
- The second computation is for the inherited part of the property.
Continue depreciating the original basis under the same method
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_publink100099655If 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_publink100099656A 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_publink100099657If 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.
- 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 the following.
- Donated property for which a deduction of more than $5,000
is claimed.
- 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_publink100099659Your 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, later.
Some other items of income that a survivor or beneficiary may
receive are discussed below. Lump-sum payments received by the surviving spouse
or beneficiary of a deceased employee may represent the following.
- Accrued salary payments.
- Distributions from employee profit-sharing, pension, annuity,
and stock bonus plans.
- Other items that should be treated separately for tax purposes.
The treatment of these lump-sum payments depends on what the
payments represent.
Special rules apply to certain amounts received due to the death
of a public safety officer (a law enforcement officer, fire fighter, chaplain,
or member of an ambulance crew or rescue squad).
| 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.
|
taxmap/pubs/p559-002.htm#en_us_publink100099664The 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. This 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. Any repayment
waived is not included in income.
taxmap/pubs/p559-002.htm#en_us_publink100099665Generally, 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.
| 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. |
taxmap/pubs/p559-002.htm#en_us_publink100099667An 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 his or her IRA 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_publink100099669For 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_publink1000240361If 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_publink100099671Estates 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.
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