Avoid Double Taxation on Inherited Assets with IRD Deduction

AAFCPAs would like to make clients aware of an often-missed tax deduction available to heirs of pre-tax assets, such as: retirement plan assets, IRA distributions, unpaid interest and dividends, salary, wages, sales commissions, etc.  The income in respect of a decedent (IRD) deduction, Section 691(s) under the Internal Revenue Code, can reduce the income tax beneficiaries may owe by mitigating the combined income-and-estate-tax effect.
IRD Deduction, Estate Taxes - Avoid stacking, "double" taxationEstate taxes on an inheritance may result in a significant tax obligation – as much as 40% of the value of the account!  If missed, you, as a beneficiary, may be subject to double taxation: paying the estate tax at 40% and income tax on the same assets by as much as 39.6%. The purpose of the IRD deduction is to avoid this stacking “double” taxation effect, by providing that beneficiaries receive an income tax deduction for any additional estate taxes that were caused by that pre-tax asset.
When is the deduction applicable?
The deduction applies regardless of whether the decedent’s estate taxes were actually paid from that asset or with other assets.  The mere fact that the pre-tax asset caused a greater estate tax liability is sufficient to trigger Section 691(c) rules.  The IRD deduction is claimed by the beneficiary of the estate, at the time the distributions occur and become includable in his/her taxable income.  If no estate tax liability was caused by the pre-tax asset, the deduction does not apply.
How do you claim the IRD deduction?
AAFCPAs advises clients to consider this deduction in advance of your personal tax return filing deadline, and share any information regarding inheritance with your AAFCPAs tax team.  In cases where the IRD deduction was over-looked on previous income tax returns, or when the individual tax return was filed before the estate tax return was finalized, taxpayers may file an amended individual income tax return to claim this significant deduction. In either case AAFCPAs can work with you to take advantage of this significant deduction by computing it in accordance with Section 691(c) complex rules, and if necessary, by amending an individual income tax return to claim this deduction.
AAFCPAs understands that every tax situation is unique and requires a careful and comprehensive plan.  We communicate regularly and openly with our clients to ensure a full understanding of all strategic options available.  AAF’s proactive and innovative approach to tax planning enables our clients to decrease both their current and future tax liabilities, and achieve compliance with peace of mind.
For further information, please contact your AAFCPA partner or Rich Weiner at 774.512.4078, rweiner@nullaafcpa.com.

About the Author

Rich has over 30 years of broad tax experience with a specialty in tax planning and consulting for private and publicly-held businesses. Rich has specific expertise in the Software, Bio-Technology, Medical Device, Life Science, Manufacturing, Retail, Professional Service and Publishing industries, as well as U.S. aspects of international taxation. He works extensively with European companies expanding into the U.S. market. Additional areas of focus include companies and stockholders in transition, including structuring of and planning for Mergers & Acquisitions, planning for changes in ownership and management, and adoption of tax methodologies with a view toward the long term. He is well known in his field and is a frequent speaker on a variety of tax related topics.

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