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My Client's taxable estate is about $2,150,000. The estate tax on that amount is approximately $69,000. Included in the $2,150,000 taxable estate is about $500,000 worth of IRD items. (Individual retirement accounts and untaxed annuities). In this situation, my client pays an estate tax all because of IRD income. Below I have listed two of my thoughts regarding calculating the estate tax deduction on IRD items on the beneficiaries individual returns. My two thoughts are as follows:
Is the deduction based on a ratio of the total tax of $69,000 as compared to the total of all IRD items. In that case the beneficiaries would take about a 13.8% deduction on their return for each IRD item included (69,000/500,000) =13.8%). Of course, the total deduction would be limited to $69,000.
Or is the deduction based on a ratio of the total tax of $69,000 as compared to only the excess IRD items over the $2 million exemption. In this case the beneficiaries would take about a 46% deduction on their return for each IRD item included (69,000/150,000). Of course, the total deduction would be limited to $69,000.
Does anyone have an idea as to the correct calculation of Estate Tax on IRD in this situation?
Thank You,
Larry Maher CPA (West Los Angeles)
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The deduction uses a within and without calculation. If you refigured your estate tax without the IRD items, no tax would be payable so the entire estate tax is attributable to the IRD assets. The next step would be to allocate the tax amongst the assets. I use the ratio of FMV of each IRD item, to the total IRD items. In a simple example, if accrued interest is 10k and the IRA is 490k - 10/500ths of the estate tax would be allocated to the interest and probably collected and reported on the first 1041. The balance would be deducted as the IRA is collected.
Mary Kay Foss
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Mary Kay,
Thanks for the info.
Larry Maher
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I think Mary Kay is correct. It would be tempting to take the IRD deduction on the first $150,000 but that's not what the regs (1.691(c)-1) look like.
...an amount which bears the same ratio to such portion as the value in the gross estate of the right to the income included by such person in gross income (or the amount included in gross income if lower) bears to the value in the gross estate of all the items of gross income in respect of the decedent.
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