Income in Respect of a Decedent (IRD) 2026: The §691(c) Deduction Explained

You inherited it, so why is the IRS still taxing the income?

Here is the moment that catches heirs off guard. The estate settled up, the estate tax (if any) got paid, and yet every time you pull money out of the traditional IRA you inherited, a fresh income tax bill shows up. What is going on? Three letters: IRD. Income in respect of a decedent, defined in Internal Revenue Code §691, and it is one of the least understood corners of the whole inheritance process.

My read is that if you understand IRD before you touch the account, you keep thousands of dollars that most people hand to the IRS by accident. IRD is income the deceased had earned, or had a locked-in right to receive, but had not actually collected and had not paid income tax on by the time they died. The tax code does not let that untaxed income vanish. Instead it lands on whoever receives it, carrying the exact income tax the decedent would have owed.

The honest take comes down to two facts. First, there is no step-up in basis on IRD, which is the single feature that separates it from ordinary inherited assets. Second, IRD can be taxed twice, by both estate tax and income tax, and the relief valve for that is the §691(c) deduction. Miss either point and you will badly misjudge what your inheritance is actually worth after tax.

This is not a niche problem. Anyone who inherits a retirement account, a deferred comp balance, or a rental business with receivables is walking straight into IRD, usually without knowing the term.

The rules that govern how fast you have to drain an inherited account interlock with all of this, which is why the inherited IRA 10-year rule guide is a natural companion to what follows.

What “no step-up” really costs you

The fastest way to grasp IRD is to hold it next to an ordinary capital asset, because that contrast is where the whole thing lives.

Say the decedent bought stock decades ago for $10,000 and it was worth $100,000 on the day they died. When you inherit that stock, its basis resets to the $100,000 date-of-death value. That is the step-up. The $90,000 of appreciation the decedent never paid tax on simply disappears for income tax purposes. Sell it the next day for $100,000 and your taxable gain is zero.

Now put $100,000 in a traditional IRA instead. That money went in pre-tax and grew tax-deferred; income tax has never touched it. Section 1014(c) explicitly says IRD gets no step-up. So when you withdraw from the inherited IRA, every dollar is ordinary income to you, taxed at your rates in the year you take it.

Feature	Ordinary capital asset (stock, real estate)	IRD asset (traditional IRA, etc.)
Step-up in basis	Yes, resets to date-of-death value	No, denied by §1014(c)
Income tax the heir owes	Only on post-death appreciation	On the full amount withdrawn
Character of income	Capital gain	Same as it would have been for the decedent
Included in the taxable estate	Yes	Yes (double-tax exposure)

That one table is the heart of it. Two accounts can both read $100,000, and be worth wildly different amounts after tax. The stock is nearly its face value; the inherited IRA is worth face value minus whatever income tax rate you will eventually pay on it. Always discount an IRD asset by its future tax before you treat it as spendable.

This is exactly why smart estate plans think about which heir gets which asset. Steering IRD assets to lower-bracket heirs and step-up assets to higher-bracket heirs raises the whole family’s after-tax result. And it is why the capital gains tax guide makes a useful contrast piece: it walks through the step-up world that IRD is deliberately shut out of.

Which assets count as IRD?

IRD is not just IRAs. Any income the decedent earned but left uncollected and untaxed is a candidate. Here are the ones that show up in real estates.

IRD type	Concrete examples	Character to the heir	Step-up
Retirement accounts	Traditional IRA, 401(k), pension distributions	Ordinary income	No
Deferred compensation	Unpaid NQDC balances, employer stock deferred comp	Ordinary income	No
Accrued receivables	Rent earned before death, cash-basis A/R	Ordinary income	No
Final wages and pay	Last paycheck, accrued vacation, unpaid commissions	Ordinary income	No
Bond interest	Accrued untaxed interest on Series EE and HH bonds	Interest income	No
Declared dividends	Dividends declared before death but paid after	Dividend income	No
Installment sales	Remaining payments on a pre-death installment sale	Original sale character (often capital gain)	No

There is a one-line test that resolves almost every case: would the decedent have owed income tax if they had lived long enough to collect this? If yes, and they hadn’t paid it, it is IRD. If instead the asset gets a fresh date-of-death basis, it is not.

A couple of traps worth flagging. An inherited Roth IRA is technically an IRD asset, but because qualified distributions are tax-free, it produces no income tax pain, so it never becomes a tax bomb. And Series EE bonds are sneaky: the accrued interest is invisible on a statement, so heirs routinely forget it exists until they cash the bond and a chunk of interest income lands on the return.

§691(c): the fix for being taxed twice

Here is the genuinely unfair part. In a large estate, the IRD asset is pulled into the taxable estate at its full value and can be hit with estate tax. Then, when you receive that same IRD as a beneficiary, you pay income tax on it too. Same dollars, two taxes.

Congress didn’t erase the double tax, but it did blunt it, and §691(c) is the instrument. The idea is clean: you get an itemized income tax deduction for the federal estate tax that was attributable to the IRD you’re now reporting as income. Technically you compute the estate tax with the IRD in the estate versus without it, and the difference is the total §691(c) deduction, allocated to heirs in proportion to the IRD each one collects.

A worked example makes it click. The figures are illustrative bands to show the mechanics, not real tax amounts.

Item	Amount (illustrative)	Note
Total IRD asset	$500,000	Inherited traditional IRA
Estate tax with the IRD included	$200,000	IRD sits in the taxable estate
Estate tax without the IRD	$0	Assume no estate tax if IRD removed
Estate tax attributable to IRD	$200,000	Total §691(c) deduction
IRD the heir withdraws this year	$100,000	20% of the total IRD
§691(c) deduction usable this year	$40,000	$200,000 × 20%

In the example, withdrawing $100,000 from the IRA generates $100,000 of ordinary income, but you also get to subtract a $40,000 itemized deduction, so the net income you’re taxed on is closer to $60,000. Draw the IRD down over several years and the deduction spreads across those years in the same proportion.

Two practical points. First, §691(c) only exists when the estate actually paid federal estate tax. Most estates fall under the federal exemption, which sits at a high level in 2026, so there is no estate tax and therefore no deduction. Second, it is an itemized deduction, which means beneficiaries who take the standard deduction miss it entirely. If the IRD is large, run the math on switching to itemizing.

Whether your estate is even in estate-tax territory depends on thresholds that shift over time, and the estate tax rules for non-residents lay out where those lines fall, which is the first thing to check before assuming §691(c) is on the table.

Managing your bracket: where the tax bill is really decided

What drives your IRD tax is not how much you inherited, it is how you space the income out. The headline IRD asset, an inherited IRA, generally has to be emptied within 10 years under the SECURE Act, and that decade is your planning window.

The two most expensive mistakes sit at opposite extremes. One is panicking and cashing the whole account out the year you inherit it, stacking a huge lump on top of your regular income at top rates. The other is ignoring it for nine years and being forced to withdraw the entire balance in year 10, the classic tax bomb. Both are avoidable.

The approach I use has three steps.

Map your next decade of income. Find the low-income years, the gap between jobs, a sabbatical, the window after retiring but before Social Security or your own RMDs start. Those are the years to take bigger IRD distributions, because more of it comes out at low rates.

Respect the brackets and the cliffs. Fill the current bracket but stop before you spill into the next one. Then watch two thresholds that punish big withdrawals: Medicare IRMAA surcharges (based on income from two years prior, so it bites people 63 and up) and ACA marketplace subsidies (a spike can shrink or kill your premium credit).

Line the withdrawal year up with the §691(c) deduction. If the estate paid estate tax, the deduction only fires in a year you report IRD as income, so pairing larger withdrawals with the deduction magnifies the benefit.

Situation	Smart move	Why it works
High income all 10 years	Take small even withdrawals annually	Avoids one giant Year-10 jump
Low-income gap in years 4-6	Load withdrawals into those years	Pulls dollars out at lower rates
Age 63+ or on ACA coverage	Withdraw before 63, go light after	Protects IRMAA and subsidies
Inherited Roth IRA	Wait, let it grow, take it in year 10	Tax-free, so only growth matters
Large estate that paid estate tax	Sync withdrawals with §691(c)	Maximizes double-tax relief

A traditional inherited IRA is a 10-year tax project, not a “deal with it later” account. Even a crude plan of pulling roughly a tenth each year beats getting cornered into a lump sum.

Estate or heir: who reports it, and the character rule

Where IRD lands on a return depends on who collects it. If the estate receives the item during administration, it goes on the estate’s income tax return (Form 1041). If the account or right passes straight to a beneficiary, it goes on that person’s Form 1040.

The rule that trips people up is character carryover. IRD keeps the exact character it would have had for the decedent. Accrued rent is ordinary income to you; the remaining gain on an installment sale keeps its original (often long-term capital gain) character; Series EE interest is interest income. Inheriting it does not convert it into something friendlier.

That carryover cuts both ways. Unrealized gain on inherited capital assets vanishes under the step-up, but the deferred capital gain baked into an IRD installment note survives and flows to you intact. Two things that look like “assets” can behave completely differently depending on whether they get a step-up or count as IRD.

There is also a planning angle during administration. Estate income tax brackets are compressed, hitting the top rate at a very low income level, so income trapped in the estate can be taxed harder than it would be in an individual’s hands. Timing distributions so the IRD is carried out to beneficiaries and taxed on their returns is often the cheaper path.

The wrapper you use to hold and route these assets, a will versus a living trust, shapes how and when IRD flows, which the living trust versus will guide walks through in detail.

The mistakes people make with IRD

The same errors repeat, and each one is preventable.

Never claiming §691(c). Heirs of large estates routinely miss this deduction because you can only compute it from the estate’s own estate tax return. File the income tax return in isolation and the deduction disappears.

Cashing out the IRA in one year. The bracket-spike problem again. Treating the inherited balance as spendable cash and pulling a lump sum inflates that year’s tax.

Taking the standard deduction and losing §691(c). Knowing about the deduction isn’t enough; if you don’t itemize, the benefit is zero. When the IRD is large, model the itemize-versus-standard trade-off.

Forgetting Series EE and HH interest. The accrued interest isn’t visible like an account balance, so heirs miss it until the bond is redeemed and the interest income surfaces.

Assuming a step-up applies. Believing IRD gets a step-up and being blindsided by income tax on withdrawal is the textbook error, and it’s why people overestimate what an inherited IRA is worth.

Check those five and the after-tax value of the inheritance changes materially. IRD boils down to one sentence: it is the income tax the decedent deferred, now handed to the person who inherits. The whole game is where you place that burden.

Bringing it together for 2026

The balance on an inherited account and its after-tax value are two different numbers. A step-up asset is close to face value; an IRD asset should be discounted by the income tax still owed on it. And if the estate paid estate tax, §691(c) lets you claw part of that burden back.

My rule of thumb is three lines. Sort every inherited asset into IRD or not-IRD first. Treat a traditional IRD like an inherited IRA as a 10-year planning window and spread withdrawals into your low-income years. And if the estate paid estate tax, claim the §691(c) itemized deduction rather than leaving it behind. Those three decisions move the after-tax outcome more than anything else.

When retirement accounts hold unconventional assets like real estate, IRD treatment at death gets messier, and the self-directed IRA real estate guide is worth reading to understand the structure you’d be inheriting.

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This article is for general educational purposes only and is not tax, legal, or financial advice. How IRD and §691(c) apply depends on your specific facts, including the date of death, the size and composition of the estate, the type of asset, and your own income situation, and the rules are subject to changes in federal and state law. Consult a qualified tax professional and confirm current IRS guidance before making any distribution or filing decisions.