How Income After Death Is Taxed

What is IRD (Income in Respect of a Decedent)?

Income in respect of a decedent (IRD) is income the individual earned during their lifetime but did not receive before death. IRD includes:

• Uncollected salaries
• Deferred compensation
• Bonuses
• Taxable retirement account distributions
• Accrued but unpaid interest
• Dividend payments
• Uncollected alimony
• Uncollected rent

Income can also be generated after a person’s death by their estate. For instance, a rental property owned by the decedent’s estate might continue to produce monthly rent, or stock held by the estate might continue to pay dividends. These earnings are subject to income tax if they’re received by the estate or distributed to beneficiaries. In general, the person or estate that actually receives the income is the one responsible for reporting and paying the tax on it. The estate or beneficiary must properly report that income after death.

Unlike income tax on IRD or estate earnings, an estate tax applies to the total value of the decedent’s assets at death. The estate is responsible for ensuring the estate tax is paid before distributing assets to heirs. Any estate tax paid may also qualify for deductions under certain circumstances.

Once beneficiaries assume ownership of inherited assets, they also assume any future tax liability associated with those assets (for example, income tax on later earnings). If an estate has $600 or more of gross income, the estate must file Form 1041. Beneficiaries report income only if it is distributed to them and reported on Schedule K-1.

Who Reports Income After Death to the IRS?

After a death, the IRS still expects the decedent's income tax return to be filed on the decedent's behalf. Who reports that income depends on the surviving spouse’s filing status. If a surviving spouse files a joint return for the year of death, they report the decedent’s income earned up to the date of death. Income earned after death is generally reported by the estate or beneficiary who receives it.

Otherwise, a decedent’s final income tax return will be filed by the estate’s executor or court-appointed personal representative. In that case, the estate is responsible for reporting the decedent’s income up to the date of death and paying any related income tax liabilities. The executor is also responsible for handling any applicable estate taxes.

Source: IRS Pub. 559, Income After Death

Example Scenario Table: Estate Income vs. Final Return

The table below shows common income scenarios and explains whether the income is reported on a final return or an estate return.

After death, the executor or beneficiary must also report any income earned by the estate after the individual’s passing. For example, stock dividends, rental income, or interest may continue to accrue on estate assets. This post-death income is reported on Form 1041 (U.S. Income Tax Return for Estates and Trusts) by the party that actually receives the income — either the estate or the beneficiary.

Special Tax Rules for Retirement Accounts After Death

After someone passes away, the required minimum distribution (RMD) after death refers to the amount the account owner was supposed to withdraw in the year they died but didn’t take before passing. If the decedent had a required minimum distribution (RMD) due in the year of death but did not take it, the beneficiary must withdraw it by December 31 of that year.

Any future withdrawals from the retirement account are called IRA distributions after death. These follow the IRS’s beneficiary distribution rules, which depend on the type of account and the beneficiary's relationship to the deceased (for example, a spouse beneficiary has more options than a non-spouse beneficiary).

Pro Tip: Unpaid salary or retirement distributions are still taxable even if received after death.

Most distributions from inherited retirement accounts are taxable to the beneficiary when received. However, distributions attributable to after-tax contributions are not taxed again.

Source: IRS Pub. 590-B, Distribution

Social Security After Death

When someone who paid into Social Security passes away, their eligible family members may be able to receive survivor benefits from the Social Security Administration (SSA). These benefits replace part of the income the deceased person would have provided.

Family members eligible to receive Social Security survivor benefits are: 

• Surviving spouse: including a widow or widower age 60 or older (or 50 or older if disabled)
• Surviving spouse caring for a child under age 16 or disabled
• Unmarried children of the deceased who are:
• • Under age 18, or
  • Up to age 19 if attending high school full time, or
  • Any age if they became disabled before age 22
• Dependent parents of the deceased, age 62 or older, if they relied on the deceased for at least half of their support
• Divorced spouse: if the marriage lasted 10 years or more and the divorced spouse meets age or caregiving requirements

It’s important to know that Social Security benefits stop when a person dies. Any payment issued for the month of death must usually be returned to the SSA. However, survivor benefits can begin soon after, if the family applies and qualifies.

Whether survivor benefits are taxable depends on the recipient’s total income. Many people don’t pay taxes on their Social Security benefits, but they can be partly taxable if the person’s combined income (including wages, pensions, or investments) exceeds certain IRS limits.

Reminder: Social Security benefits stop at death, but survivor benefits may be taxable.

Taxes on Income Earned Before vs. After Death

Knowing how different types of income are handled after someone’s death can help you plan ahead. For federal estate tax purposes, the total fair market value of the decedent's gross estate at the time of death may be subject to estate tax, which is paid by the estate’s executor using estate funds.

However, any income earned after death, such as interest, rent, or dividends that continue to come in, is not part of the estate tax calculation. Instead, that income is taxable to the person or entity that receives it, such as the estate or a beneficiary.

IRS References

IRS Pub. 559 is a great, in-depth resource that can help executors and personal representatives find the information they need to report and pay taxes on income after a person’s death. Pub 559 IRD guidance is available in the manual on the IRS website.

Estate executors or beneficiaries who are collecting estate-generated income can also find a detailed guide to the IRS Form 1041 instructions on the website.

Everything You Need to Know About Documenting Income After a Death

After a loved one passes away, the Internal Revenue Service doesn’t consider their accounts closed or resolved until a final return is filed on their behalf. That person might also still be owed money in the form of IRD or income generated by their estate after they pass away.

In general, the person or entity that receives the IRD or estate income must report it to the IRS and pay any taxes on it.

Learn how to report post-death income by browsing through all of our resources today.