This section contains information about the effect of an individual's death on the income tax liability of the survivors (including the widow or widower and the beneficiaries) and the estate. Any survivor should coordinate the filing of his or her own tax return with the personal representative handling the decedent's estate. The personal representative can coordinate filing status, exemptions, income, and deductions so that the final return and the income tax returns of the survivors and the estate are all filed correctly.

Gifts and inheritances.
Property received as a gift, bequest, or inheritance is not included in your income. However, if property you receive in this manner later produces income, such as interest, dividends, or rentals, that income is taxable to you. If the gift, bequest, or inheritance you receive is the income from property, that income is taxable to you.

If you inherited the right to receive income in respect of the decedent, see Income in Respect of the Decedent, later.

Joint return by surviving spouse.
A surviving spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years. For more information, see Qualifying Widow(er) With Dependent Child in chapter 2.

Decedent as your dependent.
If the decedent qualified as your dependent for the part of the year before death, you can claim the full exemption amount for the dependent on your tax return, regardless of when death occurred during the year.

If the decedent was your qualifying child, you may be able to claim the child tax credit.

Income in Respect of the Decedent

All gross income that the decedent would have received had death not occurred and that was not properly includible on the final return, discussed earlier, is income in respect of the decedent.

How To Report

Income in respect of a decedent must be included in the gross income of one of the following.

• The decedent's estate, if the estate receives it.
• The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it.
• Any person to whom the estate properly distributes the right to receive it.

If you have to include income in respect of the decedent in your gross income, you may be able to claim a deduction for the estate tax paid on that income. For more information, see Estate Tax Deduction, later.

Example 1.
Frank Johnson owned and operated an apple orchard. He used the cash method of accounting. He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. When the estate was settled, payment had not been made and the estate transferred the right to the payment to his widow. When Frank's widow collects the $2,000, she must include that amount in her return. It is not to be reported on the final return of the decedent nor on the return of the estate.

Example 2.
Assume Frank Johnson used the accrual method of accounting in Example 1. The amount accrued from the sale of the apples would be included on his final return. Neither the estate nor the widow will realize income in respect of the decedent when the money is later paid.

Example 3.
Bob Clark was entitled to a large salary payment at the date of his death. The amount was to be paid in five annual installments. The estate, after collecting two installments, distributed the right to the remaining installments to you, the beneficiary. None of the payments were includible in Bob's final return. The estate must include in its gross income the two installments it received, and you must include in your gross income each of the three installments as you receive them.

Transferring your right to income.
If you transfer your right to income in respect of a decedent, you must include in your income the greater of:

1. The amount you receive for the right, or
2. The fair market value of the right at the time of the transfer.

Fair market value (FMV).
FMV is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

Giving your right to income as a gift.
If you give your right to receive income in respect of a decedent as a gift, you must include in your gross income the fair market value of the right at the time you make the gift.

Type of income.
The character or type of income that you receive in respect of a decedent is the same as it would have been to the decedent if he or she were alive. If the income would have been a capital gain to the decedent, it will be a capital gain to you.

Interest accrued on savings certificates.
The interest accrued on savings certificates (redeemable after death without forfeiture of interest) that is for the period from the date of the last interest payment to the date of the decedent's death, but not received as of that date, is income in respect of a decedent. Interest for a period after the decedent's death that becomes payable on the certificates after death is not income in respect of a decedent, but is taxable income includible in the gross income of the respective recipients.

Installment obligations.
If the decedent had sold property using the installment method and you collect payments on an installment obligation you acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Include in your income the same profit the decedent would have included had death not occurred. For more information on installment sales, see Publication 537, Installment Sales.

If you dispose of an installment obligation acquired from a decedent (other than by transfer to the obligor), the rules explained in Publication 537 for figuring gain or loss on the disposition apply to you.

Medical savings account (MSA).
The treatment of an MSA, including a Medicare+Choice MSA, at the death of the account holder depends on who acquires the interest in the account. If the decedent's estate acquired the interest, see the earlier discussion under How to Report Certain Income.

If the decedent's spouse is the designated beneficiary of the MSA, the MSA becomes that spouse's MSA. It is subject to the rules discussed in Publication 969.

Any other beneficiary (including a spouse that is not the designated beneficiary) must include in gross income the fair market value of the assets in the account on the decedent's date of death. This amount must be reported for the beneficiary's tax year that includes the decedent's date of death. The amount included in gross income is reduced by the qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the decedent's date of death. An estate tax deduction, discussed later, applies to the amount included in income by a beneficiary, other than the decedent's spouse.

Individual retirement arrangements (IRSs).
The treatment of a decedent's IRAs, including education IRAs and Roth IRAs, is covered in Publication 559.

Other income.
For examples of other income situations concerning decedents, see Specific Types of Income in Respect of a Decedent in Publication 559.

Deductions in Respect of the Decedent

Items such as business expenses, income-producing expenses, interest, and taxes, for which the decedent was liable but which are not properly allowable as deductions on the decedent's final income tax return, will be allowed as a deduction when paid to one of the following.

• The estate.
• The person who acquired an interest in the decedent's property (subject to such obligations) because of the decedent's death, if the estate was not liable for the obligation.

Estate Tax Deduction

Income that a decedent had a right to receive is included in the decedent's gross estate and is subject to estate tax. This income in respect of a decedent is also taxed when received by the recipient (estate or beneficiary). However, an income tax deduction is allowed to the recipient for the estate tax paid on the income.

The deduction for estate tax can be claimed only for the same tax year in which the income in respect of the decedent must be included in the recipient's gross income. (This also is true for income in respect of a prior decedent.)

You can claim the deduction only as a miscellaneous itemized deduction on Schedule A (Form 1040). This deduction is not subject to the 2% limit on miscellaneous itemized deductions as discussed in chapter 30.

If the income in respect of the decedent is capital gain income, the gain must be reduced, but not below zero, by any estate tax deduction attributable to that gain when figuring the maximum capital gain tax, the 50% exclusion for gain on small business stock, or any net capital loss limitation.

For more information, see Estate Tax Deduction in Publication 559.

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