J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

11.17 Deduction for Estate Tax Attributable to IRD

A beneficiary can claim an itemized deduction for the amount, if any, of federal estate tax paid on income in respect of a decedent (IRD). The deduction is allowed to the IRD recipient only for the year in which the recipient reports the IRD income. No deduction is allowed for state death taxes paid on IRD. If you receive IRD, ask the executor of the decedent’s estate for the amount of federal estate tax paid and the portion of the estate that the IRD represented to help you compute the deduction.

The itemized deduction is a miscellaneous deduction claimed on Line 28 of Schedule A. The Line 28 deduction is not subject to the 2% AGI floor that applies to most miscellaneous itemized deductions.

However, if the IRD you receive is long-term capital gain, such as an installment payment on a sale transacted before a decedent’s death, the estate tax attributed to the capital gain item is not claimed as a miscellaneous deduction. The deduction is treated as if it were an expense of sale and, thus, reduces the amount of gain, but not below zero.

EXAMPLE

When Jim Bennett’s uncle died, he was owed a fee of $10,000. He also had not collected accrued bond interest of $5,000. Bennett, as the sole heir, will collect both items and pay income tax on them. These items are called “income in respect of a decedent.” Assume that an estate tax of $5,250 was paid on the $15,000. Bennett collects the $10,000, which he reports on his income tax return. ...