Income Tax & IRD Calculations

The Concept

Introduction

The Strategy

The Proposal

The Estate Tax Problem

The Income Tax & IRD Problem

The Long Term Care Problem

Income Tax and IRD Calculations

In addition to estate taxes, there is income tax due on income in respect of decedent (IRD). IRD can be defined as the income received by the beneficiary that would have been taxed if received by the deceased. There is a deduction for the estate taxes paid from the IRD amount. (Note: This is a deduction, not a tax credit.) Remember, there is no credit for the estate taxes paid against the income tax due. The credit is only applied to the amount of IRD which is taxable.

IRD = Gain - (Gain x Estate Tax Rate)

IRD = (Gain - (Estate Tax x (1 - (Cost Basis ÷ Asset Value ))))

Example:

Current Asset Value:

$250,000

Cost Basis:

$175,000

Rate of Return:

10%

Income Tax Rate:

28%

Heirs' Income Tax Rate:

31%

Estate Tax Rate:

37%

Estate Tax = ($250,000 x 0.37) = $92,500
IRD = ($75,000 - ($92,500 x (1 - ($175,000/$250,000))))
IRD = $47,250
Income Tax = ($47,250 x 0.31) = $14,647
Net to Heirs = ($250,000 - ($92,000 + $14,647))
Net to Heirs = $142,852

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