The income in respect of a decedent (IRD) rules can reduce the tax if you inherit an annuity from an estate that paid estate tax. You’re entitled to an offsetting income tax deduction in the future.
Suppose you inherit an annuity worth $250,000 from an estate that paid $300,000 in federal estate tax. According to a tax pro who crunches the numbers, the estate tax bill would have been $200,000, without including the annuity. Therefore, the annuity added $100,000 to the estate tax bill. That’s a 40 percent rate: $100,000 is 40 percent of $250,000. The tax code says that you can take an income tax deduction for that $100,000 estate tax payment when you receive distributions from the inherited annuity, at the IRD ratio (40 percent in this example).
Say you receive $10,000 from the inherited annuity the first year. You would be entitled to a $4,000 deduction-40 percent of the $10,000 distribution-so you would owe income tax on a $6,000 distribution instead of a $10,000 distribution. After taking this $4,000 deduction, you would have $96,000 worth of IRD deductions left to use: $100,000 minus $4,000. This would go on for 25 years, until the entire $100,000 has been deducted.
IMPORTANT NOTE FOR EXECUTORS:
Please see item # 10 below if you have been appointed executor, guardian or trustee on a loved ones estate.
