Income in respect of a decedent is that which the decedent had a right to receive prior to death but which was not properly includible on his or her final income tax return. It retains its same character to the recipient as it would have had in the hands of the decedent. There is no step-up in basis under Sec. 1014(c), so the same gross profit margin is used on an installment receipt. The gross profit margin was 50% ($150,000 ÷ $300,000), so $37,000 [($60,000 installment receipt × 50%) + $7,000 accrued interest] is income in respect of a decedent. The remaining $30,000 is merely a return of capital.

The interest on the installment debt is not income in respect of a decedent except for the portion accrued before death. All the interest received must also be reported on Form 1041.

Adjusted total income includes items such as interest income, dividends, and capital gains. Adjusted tax-exempt interest is added to adjusted total income. Capital gains are then subtracted from this figure to calculate distributable net income (DNI). In figuring the income distribution deduction, the trust is not allowed a deduction for any item of the DNI that is not included in the gross income of the trust. Thus, the adjusted tax-exempt interest must be subtracted out. The calculation for the income distribution deduction for this simple trust is $15,000 + $2,000 – $3,000 – $2,000 = $12,000.

Generally, beneficiaries must include an entire distribution to them in gross income of distributable income from an estate. If there is an excess of currently distributable income in relation to distributable net income (figured without charitable contribution deduction), each must only include their proportionate amount of distributable net income on their gross income. Therefore, since an excess exists, Bill’s son is only required to include $4,000 ($12,000 × 1/3) in his gross income.

Publication 559 states, “Distributable net income . . . is the estate’s income available for distribution. It is the estate’s taxable income, with the following modifications. . . . If capital gains ordinarily are not allocated to corpus, they are included in distributable net income.” The fiduciary fee is deducted when arriving at taxable income.

Income that a decedent had a right to receive prior to death but that was not includible on his or her final income tax return is income in respect of a decedent. The $10,000 is properly includible in the estate’s (fiduciary) income tax return because Fred was a cash-basis taxpayer and would not properly include income not yet received at the time of death in his final return. Since the money was owed to Fred (he has a right to receive it), it is an asset of the estate and must be included on the estate tax return also.

Under Code Sec. 663(a)(1), gifts or bequests of specific sums of money or of specific property are not allowed as deductions to a trust or an estate, and they are not included in the beneficiary’s taxable income. The gift or bequest must be required by the specific terms of the will or trust instrument, and it must be paid or credited all at once or in not more than three installments.

Form 1041 is subject to a tax rate schedule that reaches the 37% tax bracket in 2021 for taxable incomes exceeding $13,050.

Publication 17 states, “In most cases, property you receive as a gift, bequest, or inheritance is not included in your income.” With respect to the IRA, Publication 17 states, “. . . may have to include part of the inherited amount in your income.” With respect to life insurance, Publication 17 states, “Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.”

Under Sec. 643(a), distributable net income (DNI) includes dividends and tax-exempt interest less expenses allocable to it. The personal exemption is not allowed. Here, the estate’s taxable income is $7,400 ($8,000 dividends – $600 personal exemption). The estate’s distributable net income is

A simple trust has the following characteristics:

1. It requires the current distribution of all its income
2. It requires no distribution of the res (i.e., principal)
3. It allows no charitable contributions

If the decedent accounted for income under the cash method, only the items actually or constructively received before the date of death are included on the final return. Constructive receipt occurred if the income became available for use by the decedent without restriction. The interest received ($800) and the wages received ($40,000) are included in income. The dividend is not included because it was not constructively received.

Publication 559 states, “Distributable net income . . . is the estate’s taxable income, excluding the income distribution deduction, with the following additional modifications.

Capital losses are excluded in figuring distributable net income unless they enter into the computation of any capital gain that is distributed or must be distributed during the year.”

Under Sec. 662, beneficiaries of an estate (and a complex trust) are required to include in gross income the amounts of fiduciary income that are required to be distributed and all other amounts that are distributed, limited to DNI. The amounts included in the beneficiaries’ gross income retain the same character as in the hands of the estate or trust and are treated as consisting of the same proportion of each classified item entering into the computation of DNI. Since DNI is $45,000, each of the three children must include $15,000 in gross income.

Income in respect of a decedent is that which is earned by the taxpayer but is neither received prior to his or her death, nor accrued prior to his or her death if on the accrual method, so it is not included in the decedent’s final return. Income in respect of a decedent is included in the recipient’s (e.g., the estate’s) income in the year received or accrued. It is calculated the same as if the decedent were still alive; therefore, Pablo’s executor will include $3,000 for the oranges and $4,000 for the truck as income in respect of a decedent.

The amount of trust income Paul must report on his tax return is equal to the income distribution deduction. DNI is $10,000 ($9,000 adjusted total income plus $1,000 adjusted tax-exempt interest). Total distributions are $7,500 ($5,000 income to be distributed currently and $2,500 of discretionary distributions). Finally, the amount of tax-exempt interest included in total distributions is subtracted to find the tentative income distribution deduction. This amount of tax-exempt interest included in total distributions is $750, found by multiplying adjusted tax-exempt interest by the fraction of total distributions over DNI [$1,000 × ($7,500 ÷ $10,000)]. The final income distribution deduction is $6,750 ($7,500 – $750).

Attorney fees, accountant fees, and executor fees are all administration expenses deductible for estate tax purposes under Sec. 2053. They may be deducted on the income tax return only if there is a statement filed that such amounts have not been allowed as deductions under Sec. 2053 and the right to deduct such amounts under Sec. 2053 is waived. Therefore, Estate Z can deduct none of these items without filing a waiver.

Publication 559 states, “Distributable net income . . . is the estate’s income available for distribution. It is the estate’s taxable income, with the following modifications. . . . Capital gains ordinarily are not included in distributable net income.” The fiduciary fee is deducted when arriving at taxable income.

100% of the tax underpaid in addition to the taxes owed.

Under Sec. 6012(a)(3), every estate that has a gross income of $600 or more must file an income tax return. Under Reg. 1.6012-3, the return to be filed by a fiduciary for an estate or a trust is Form 1041. Section 6072 requires the return to be filed on or before the 15th day of the 4th month after the end of the tax year. Because Mr. Smith’s income after death is less than $600, the estate does not have to file a return.

An estate (or trust) is taxed very similarly to an individual. Items included in the gross income of an individual are generally included in the gross income of an estate. Life insurance proceeds are excluded from gross income by Sec. 101(a), unless the policy was transferred for valuable consideration.

A penalty of 75% of underpayment of tax.

Income in respect of a decedent is provided for under Sec. 691, but there is no statutory definition. It is generally considered to be all amounts of gross income that the decedent had a right to receive prior to death but that were not properly includible on his or her final income tax return. Rent that accrues after death is not something the decedent had a right to receive prior to death, so it is not income in respect of a decedent.

Regulation 1.691(a)-1(b) defines income in respect of a decedent as those amounts to which a decedent was entitled as gross income but which were not includible in computing taxable income on his final return. For cash-basis taxpayers, income in respect of a decedent is income earned by the decedent before death but not paid until after death. A common example of income in respect of a decedent is the salary earned by an employee prior to death but not paid by the employer until after death.

All trusts must comply with the tax laws as set forth by Congress in the Internal Revenue Code.

On the final return of a deceased taxpayer, all income is reported using the same accounting method the taxpayer used before death. For most taxpayers, this is the cash method. If the accrual method is used, income accruable to the date of death is included, but income accruable only because of death is not included [Sec. 451(b)].

A trust is allowed a distribution deduction for amounts required to be distributed currently and any other amounts properly paid, credited or required to be distributed.

Section 6654(l) requires an estate to make estimated payments of income tax in all tax years except during its first 2 taxable years of existence. No estimated payments are required during its first 2 taxable years.

Publication 559 states, “If the decedent accounted for income under the cash method, only those items actually or constructively received before death are included in the final return. . . . Generally, a dividend is considered constructively received if it was available for use by the decedent without restriction. If the corporation customarily mailed its dividend checks, the dividend was includible when received. If the individual died between the time the dividend was declared and the time it was received in the mail, the decedent did not constructively receive it before death. Do not include the dividend in the final return.” Interest accrues and is available to the taxpayer.

Under Sec. 6012(a)(4), every trust that has any taxable income must file a tax return, or any trust that has gross income of $600 or more, regardless of the amount of taxable income, must file a tax return.

Section 652(a) requires a beneficiary of a simple trust to include in gross income the amount of fiduciary income (whether or not distributed), not to exceed the amount of distributable net income. The character of the income in the hands of the beneficiary is the same as in the hands of the trust [Sec. 652(b)].

The beneficiaries of Trust W are to receive $15,000 of fiduciary income. Since distributable net income is also $15,000, that amount must be included by the beneficiaries. However, $10,000 is tax-exempt interest, which is excluded from the beneficiaries’ gross incomes since it retains its character in the hands of the beneficiaries. The beneficiaries must include $5,000 in total in their gross incomes, and each beneficiary must include $2,500 as his or her share.

Under Sec. 662, beneficiaries of an estate (and a complex trust) are required to include in gross income the amounts of fiduciary income that are required to be distributed and all other amounts that are distributed, limited to DNI. The amounts included in the beneficiaries’ gross income retain the same character as in the hands of the estate or trust and are treated as consisting of the same proportion of each classified item entering into the computation of DNI. Since DNI is $30,000, each of the three children must include $10,000 in gross income.

Except as otherwise provided, the taxable income of an estate is computed in the same manner as that of individuals [Sec. 641(b)]. Most of the variations from the computation of an individual are contained in Sec. 642. Another difference is that an estate or trust is entitled to a deduction for distributions of income to beneficiaries.

The executor’s fee must be prorated between taxable and nontaxable income [$300 × ($2,000 ÷ $3,000)]. The executor’s fee is not allocated to capital gains. The taxable income of the estate is as follows:

Income in respect of a decedent (IRD) is earned by the taxpayer but not received prior to his or her death or accrued prior to his or her death if on the accrual method, so it is not included on the decedent’s final return.

Except as otherwise provided, the taxable income of an estate or a trust is computed in the same manner as that of individuals [Sec. 641(b)]. Most of the variations from the computation of an individual are contained in Sec. 642. Another difference is that an estate or a trust is entitled to a deduction for distributions of income to beneficiaries.

Income in respect of a decedent includes collections from accounts receivable after death. Thus, Ann’s income in respect of a decedent is $2,400. Ann’s salary for August is not included because it was received before her death. The rent for the last 3 months of the year has not accrued at the time of her death.

Under Sec. 677(a), a grantor is treated as the owner of a trust the income of which may be distributed or accumulated for the grantor’s spouse (without the approval or consent of an adverse party). Therefore, all of the income from Trust K is taxed to Phil.

The grantor is also taxed on income from a trust in which the income may be applied for the benefit of the grantor [Sec. 677(a)]. Use of income for the support of a dependent is considered the application of income for the benefit of the grantor. Under Sec. 677(b), however, the income of a trust that may be applied for the support of a dependent is not taxable to the grantor if it is not actually used. Therefore, only half of the income of Trust J (used for the children’s support) is taxed to Phil.

Under Sec. 643(a), distributable net income is taxable income with tax-exempt interest added and no personal exemption allowed. No deduction is allowed for expenses attributable to the production of tax-exempt income. As such, deductions for commission expenses are allowed to the extent of taxable income (75%). Also, since the capital gains are not included in the computation of distributable net income, no expenses are allocated to capital gains. This trust is not allowed a depreciation deduction because there is no reserve and all the income is distributable to the beneficiaries [Reg. 1.167(h)-1 (b)]. Capital gains are not considered as income for depreciation purposes if they are properly allocable to corpus. The income beneficiaries will be entitled to the depreciation deduction in addition to their income from the trust. The trust’s taxable income and distributable income are

NOTE: The $24,025 is calculated as

All income the decedent would have received had death not occurred that was not properly includible on the final return is income in respect of a decedent. The character of the income received in respect of a decedent remains the same as it would have been to the decedent if (s)he were alive. Income in respect of a decedent must be included in the income of one of the following: (1) the decedent’s estate, if the estate receives it; (2) the beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it; or (3) any person to whom the estate properly distributes the right to receive it. An income tax deduction is allowed to the recipient for the estate tax paid on the income.

Except as otherwise provided, the taxable income of an estate is computed in the same manner as that of individuals. The salary, interest, and dividends are income to the estate if earned, but not collected, by the decedent before death. Although life insurance proceeds are generally includible in the value of the gross estate, they are not includible in the income of the estate. The income earned by the decedent but taxable to the estate is $5,200 ($500 + $700 + $4,000).

If Bob receives a criminal conviction, he could face fines up to $250,000 for individuals ($500,000 for corporations) and/or up to 5 years in prison for each offense.

Administration expenses (and debts of a decedent) are deductible on the estate tax return under Sec. 2053, and some may also qualify as deductions for income tax purposes on the estate’s income tax return. Section 642(g), however, disallows a double deduction and requires a waiver of the right to deduct them on Form 706 in order to claim them on Form 1041. Therefore, the attorney’s fees for administration of the estate can be deducted on the estate return since it is not stated that a waiver was filed. The income earned by the decedent but taxable to the estate is calculated as follows:

The deduction for distributions allocates taxable income of a trust or an estate (gross of distributions) between the fiduciary and its beneficiaries. The deduction is the lesser of the amount of the distributions (required) or distributable net income (DNI). Generally, DNI is current net accounting income of the fiduciary reduced by any amounts allocated to the principal.

Except as otherwise provided, the taxable income of an estate is computed in the same manner as that of individuals. Interest and dividends are income to the estate if earned, but not collected, by the decedent before death. The income earned by the decedent but taxable to the estate is calculated as follows:

Some abusive techniques used to reduce income tax include

1. Depreciation of personal assets (such as a home)
2. Deduction of personal expenses
3. Splitting income over multiple entities, often filed in multiple locations
4. Underreporting income
5. Avoiding filing returns
6. Wiring income overseas and failing to report it
7. Attempting to protect transactions through bank secrecy laws in tax haven countries