The IRC § 691(c) IRD Deduction: Reduce Income Tax on Inherited IRA Distributions

If the decedent's estate paid federal estate tax, you are entitled to an income tax deduction each year you take inherited IRA distributions. Most beneficiaries — and many advisors — never claim it. On a $1M inherited IRA from an estate that paid $400,000 in estate taxes, the missed deduction can exceed $100,000 over the 10-year window.

What is Income in Respect of a Decedent (IRD)?

Income in Respect of a Decedent (IRD) is income that the decedent earned or had a right to receive before death but had not yet recognized for income tax purposes. It is income that would have been taxable to the decedent if they had lived to receive it — but because they died before receiving it, their estate must include it at fair market value, and the beneficiary must pay income tax when it is eventually distributed.¹

Common examples of IRD:

• Traditional IRA and 401(k) balances (contributions were pre-tax; growth was tax-deferred)
• Unpaid wages, commissions, or bonuses owed to the decedent at death
• Deferred compensation plans
• Installment sale payments not yet received
• Accrued interest on savings bonds not yet reported

A traditional IRA is always IRD in its entirety. The decedent received a deduction when contributing (or contributed pre-tax dollars through a workplace plan), and the account grew tax-deferred. No income tax was ever paid on any of it. When you inherit it and take distributions, every dollar is ordinary income — making it among the most heavily tax-burdened assets an estate can hold.

The double-taxation problem

Here is what happens to a large traditional IRA at death in a taxable estate:

1. Estate tax: The IRA's full fair market value is included in the gross estate. If the estate exceeds the federal exemption ($15,000,000 per person in 2026 under the OBBBA²), estate tax applies at 40% on the excess.
2. Income tax: When the beneficiary takes distributions from the inherited IRA, every dollar is ordinary income taxed at the beneficiary's marginal rate — potentially 22%, 24%, 32%, 35%, or 37%.

The same dollar of IRA value is taxed twice: first at the estate level (up to 40%), then again at the income level. The combined effective tax rate on the IRA can approach 60% for high-income beneficiaries inheriting from large estates.

IRC § 691(c) was designed specifically to offset this. It does not eliminate the double taxation, but it reduces the income tax bill by an amount equal to the estate tax that was caused by including the IRA in the estate.

Who qualifies for the § 691(c) deduction?

Three requirements must all be met:

1. The decedent's estate actually paid federal estate tax. If the estate was below the exemption ($15M in 2026) — or if the unlimited marital deduction zeroed out the estate tax — no estate tax was paid, and there is no § 691(c) deduction. The deduction is only available when real tax dollars flowed to the IRS. Most estates will not qualify (only those above $15M, or $30M for married couples with portability).
2. The IRA was included in the estate's gross estate. Traditional IRAs are always included at FMV. If the estate was taxable, the IRA contributed to the taxable amount.
3. The beneficiary itemizes deductions. The § 691(c) deduction is taken on Schedule A of the beneficiary's Form 1040. If you take the standard deduction, you cannot claim it.³ However, for large inherited IRAs from taxable estates, the deduction is often large enough to make itemizing worthwhile even for beneficiaries who otherwise would not itemize.

How to calculate the § 691(c) deduction: the "but for" method

Treasury Regulation § 1.691(c)-1(a)(2) specifies the calculation method. You calculate the estate tax twice and take the difference:⁴

1. Actual estate tax paid — the federal estate tax actually remitted on Form 706, as shown on the estate tax return.
2. Hypothetical estate tax — recalculate the estate tax as if the IRA (and all other IRD items) had been removed from the gross estate entirely.
3. The § 691(c) deduction pool = Actual estate tax paid − Hypothetical estate tax (without IRA).

This difference represents the estate tax that was caused by including the IRA. It is the deduction pool available to you as the beneficiary.

The total deduction pool is then allocated pro-rata across distributions as you take them:

• If you take 20% of the IRA's value in year 1, you claim 20% of the deduction pool in year 1.
• If you take the remaining 80% in year 8, you claim the remaining 80% of the pool in year 8.
• Any unused deduction is lost — so managing the timing of distributions also manages when you get the tax benefit.

Worked example

Consider this scenario:

• Decedent dies in 2025 with a gross estate of $20,000,000 — including a $2,000,000 traditional IRA
• The estate uses the $13,990,000 2025 exemption (OBBBA had not yet been enacted when this decedent died)
• The estate pays 40% on the taxable excess

The beneficiary has an $800,000 deduction pool to claim as they distribute the $2,000,000 inherited IRA over 10 years. If they distribute $200,000 in year 1 (10% of the IRA), they claim $80,000 of the deduction pool in year 1. At a 32% marginal income tax rate, that one-year deduction saves $25,600 in federal income tax on what would otherwise be a $200,000 income hit.

Over the full 10-year window, claiming the full $800,000 deduction at a 32% marginal rate reduces the total income tax bill by $256,000. At 37%, it's $296,000. Without knowing about § 691(c), every dollar of that savings is left on the table.

How to claim the deduction

The § 691(c) deduction is an itemized deduction claimed on Schedule A (Form 1040), Line 16 ("Other itemized deductions"). It does not appear on a 1099-R or any form issued by the IRA custodian — you must calculate it yourself, which is why it is so commonly missed.

To calculate your deduction each year, you need:

1. A copy of the decedent's federal estate tax return (Form 706) — specifically the total estate tax paid and the IRA's value as reported on the estate return.
2. The hypothetical estate tax calculation performed by the estate's attorney or CPA (or recalculated by your own advisor using the IRS estate tax tables from the year of death).
3. The total deduction pool ($800,000 in the example above).
4. Your distribution amount for this year divided by the IRA's original FMV at death — that ratio times the pool is your year's deduction.

OBBBA impact: fewer estates qualify, but larger deductions for those that do

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently increased the federal estate tax exemption to $15,000,000 per person (indexed for inflation starting 2027), with portability allowing married couples to shelter $30M combined.²

The effect on the § 691(c) deduction is mixed:

• Fewer estates qualify. With a $15M exemption, a larger share of estates will owe no estate tax at all, eliminating § 691(c) eligibility for many inherited IRA beneficiaries. For estates below $30M with a surviving spouse, portability plus OBBBA may eliminate estate tax entirely.
• Larger deductions for those above the threshold. Estates well above $15M pay substantial estate taxes — and the IRD deduction pool grows with the estate's taxable amount. A $25M estate in 2026 pays 40% on $10M = $4M in estate taxes; if the IRA is $3M of a $25M estate, the § 691(c) pool can exceed $480,000.
• Planning still matters for estates slightly above $15M. With a $15M exemption, an estate of $16M–$20M may now have estate tax where previously the TCJA exemption would have shielded it at $13.99M but the 2025 inflation-adjusted amount might not. Verify the exact year-of-death exemption with the estate's CPA.

Interaction with the SECURE Act 10-year rule

For non-eligible-designated beneficiaries (most adult children, grandchildren, and siblings), the SECURE Act requires full depletion of the inherited IRA by December 31 of the 10th year after the original owner's death. The § 691(c) deduction pool is spread proportionally across distributions — so how you pace your distributions affects when you receive the tax benefit.

Three strategies to consider:

1. Claim deductions in high-income years. Because the deduction is an itemized deduction that reduces ordinary income, it is worth more in high-bracket years. If your income varies significantly across the 10-year window — perhaps you retire at year 5, dropping from 37% to 24% — front-loading large distributions while you are in the 37% bracket lets you claim more of the § 691(c) pool at a higher value.
2. Coordinate with your standard-vs-itemized threshold. The § 691(c) deduction only helps if you are itemizing. In years where your other itemized deductions (mortgage interest, state taxes, charitable gifts) already exceed the standard deduction, adding the § 691(c) deduction costs nothing extra. In years where you would otherwise take the standard deduction, you may need a large enough § 691(c) amount plus other deductions to make itemizing worthwhile.
3. Do not defer everything to year 10. A lump-sum distribution in year 10 generates the full § 691(c) pool in a single year — a large deduction but also a massive ordinary income event in the same year. The deduction may not fully offset the damage from hitting the highest tax brackets and triggering IRMAA. Spreading distributions and deductions across multiple years almost always produces better outcomes. See the Tax Strategies guide and the Roth Conversion Coordinator.

Inherited Roth IRA: no IRD deduction (and no need for one)

Roth IRA contributions are made with after-tax dollars. The Roth IRA is still included in the decedent's gross estate (and may create estate tax if the estate is large enough), but qualified distributions from an inherited Roth IRA are income-tax-free. Because the beneficiary owes no income tax on Roth distributions, there is no "double taxation" to remedy, and the § 691(c) deduction does not apply to inherited Roth IRAs.

If both a traditional inherited IRA and an inherited Roth IRA are part of the same estate, the § 691(c) deduction pool is calculated only for the traditional IRA portion — the Roth is excluded from the IRD calculation. See the Inherited Roth IRA guide for full rules on distributions and the 10-year rule for Roth beneficiaries.

State estate tax and the IRD deduction

The IRC § 691(c) deduction covers federal estate tax only. A handful of states (including Massachusetts, Oregon, Washington, Minnesota, and Illinois) impose their own estate taxes at lower exemption thresholds — sometimes as low as $1M or $2M. State estate taxes paid on an inherited IRA do NOT generate a federal § 691(c) deduction; they remain a state-level cost with no federal income tax offset.

Some states with their own income taxes may have analogous state-law IRD deductions. This varies by state and is worth asking your advisor or CPA to check if you live in a state with an estate tax.

Common mistakes

1. Never requesting Form 706 from the executor. The calculation is impossible without the estate tax return. Request it before the estate closes, and keep it with your tax records for the entire 10-year distribution window.
2. Assuming the custodian reports it. The IRA custodian issues a 1099-R reporting the distribution amount. Nothing on the 1099-R references § 691(c). Your tax software and many tax preparers will not prompt you for it. You must raise it proactively.
3. Thinking it doesn't apply because "the estate paid taxes, not me." The § 691(c) deduction belongs to the beneficiary, not the estate. The estate paid the taxes; you claim the income tax offset as you take distributions.
4. Using the wrong calculation method. Allocating the deduction by the IRA's share of the gross estate (a shortcut) can produce a different result than the required "but for" method in Treas. Reg. § 1.691(c)-1(a)(2). The correct method recalculates the estate tax removing all IRD items, not just the IRA.
5. Forgetting to itemize. If you do not itemize in a given year, you cannot claim § 691(c) for that year's distributions. The unused deduction pool does not carry forward — it is permanently lost for distributions taken in years you take the standard deduction.
6. Ignoring the state-estate-tax nuance. State estate taxes do not feed the federal § 691(c) deduction. Conversely, some states have their own income tax deductions for IRD that are computed separately from the federal deduction.

Sources

1. 26 U.S. Code § 691 — Recipients of income in respect of decedents (LII / Cornell Law School). Defines IRD, establishes the § 691(c) income tax deduction for estate tax attributable to IRD items, and outlines allocation rules for partial distributions.
2. IRS — 2026 Tax Inflation Adjustments Including OBBBA Amendments. Federal estate and gift tax exemption for 2026: $15,000,000 per individual, made permanent by the One Big Beautiful Bill Act (signed July 4, 2025). Estate tax rate: 40% on taxable amounts above the exemption. Verified May 2026.
3. 26 CFR § 1.691(c)-1 — Deduction for estate tax attributable to income in respect of a decedent (e-CFR / LII). Treasury regulation specifying the "but for" calculation method: compare actual estate tax to hypothetical estate tax computed without IRD items. Deduction is pro-rated to each year's distributions. Schedule A, Line 16. Verified not subject to § 67(b) 2% floor.
4. Kitces — Understanding the IRC Section 691(c) IRD Deduction for Inherited IRA Beneficiaries. Comprehensive analysis of the § 691(c) deduction mechanics, the "but for" method, itemizing requirement, interaction with the standard deduction, and practical missed-deduction scenarios. Cross-checks the regulatory calculation method.

Estate tax figures verified as of May 2026 against IRS.gov and current Treasury regulations. IRC § 691(c) is a permanent provision of the tax code with no sunset. The standard deduction amounts cited are approximate 2026 values — verify the exact current-year figure at IRS.gov before making decisions. This guide covers federal rules only; state-specific estate and income tax treatment varies.