If the decedent used the cash method of reporting income, only income actually or constructively received before the date of death should be reported on the final return. For example, the dividends from a money-market mutual fund earned through the date of death are reported on the decedent's final tax return. Dividends earned after the date of death are taxable to the beneficiary of the account or the estate and are reported by the beneficiary or estate.

If the decedent used the accrual method, include income accrued through the date of death even if it wasn't received. The accrual method is normally used only for business income.

Income in respect of a decedent is income the decedent had a right to receive at the time of death but that isn't properly included on the final return. The income is taxable to the estate or other person who receives it.

Consider these examples:

  • Joe owned and operated an orchard. He sold $2,000 worth of fruit to a customer, but didn't receive payment before his death. That amount isn't reported on Joe's final return. When the estate was settled, the right to receive payment went to Joe's niece. When she collects the money, she'll report it as taxable income.
  • Pam had a right to a bonus from her employer at the time she died. The bonus is not included on her final return. When the estate or beneficiary collects it, it will reported on the return of the estate or beneficiary.

 


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