Income Received After Death: Tax Treatment

When someone dies, income doesn't stop immediately — last paychecks arrive, interest accrues, and various payments continue. How this income is taxed depends on whether it was earned before or after death, and who receives it. This guide explains the tax treatment of income received after a person's death.

Two Tax Frameworks

Income after a death is handled in one of two tax frameworks:

Final Form 1040 — covers income earned or constructively received by the deceased through the date of death
Estate/Beneficiary income taxes — covers income earned after death, reported on Form 1041 (estate income tax return) or on the beneficiary's personal return

The dividing line is the date of death. Income earned before death is reported on the final Form 1040. Income earned after death is reported by whoever receives it — the estate or a beneficiary.

Income in Respect of a Decedent (IRD)

A key concept is "Income in Respect of a Decedent" (IRD) — income the deceased had earned or was entitled to before death, but which was not received until after death. IRD is not reported on the final Form 1040; it's taxable to whoever actually receives it.

Common IRD items:

Final paycheck: Wages earned before death but paid after — IRD to the beneficiary or estate that receives it
Retirement account distributions: IRA and 401(k) distributions to beneficiaries — IRD taxed as ordinary income when distributed
Deferred compensation: Bonus, commission, or deferred comp payments earned before death and paid after
Savings bond interest: Interest that accrued on savings bonds during the deceased's lifetime that wasn't reported annually
Accounts receivable for self-employed individuals: Business income earned before death but not yet collected
Installment sale payments: Payments received after death on an installment sale the deceased had made

IRD is taxable to the recipient, not the estate

The unique feature of IRD is that it doesn't receive a stepped-up basis at death. It retains its character (salary is ordinary income, capital gains are still capital gains) and is taxable when received by whoever ultimately gets the money — whether that's the estate or the beneficiaries directly.

The IRD deduction

To prevent double taxation (estate tax + income tax on the same item), the recipient of IRD can deduct the estate tax attributable to the IRD item. This "IRD deduction" is an itemized deduction on Schedule A. For large estates, this can be significant. A tax professional should calculate this deduction.

Interest and Investment Income After Death

Interest and dividends earned on the deceased's financial accounts after the date of death are not IRD — they are ordinary estate income. They are reported on Form 1041 (the estate's income tax return) if the estate earns more than $600 in income during the tax year.

The Estate Income Tax Return (Form 1041)

If the estate earns more than $600 in income during the tax year (from any source — interest, dividends, rent from estate property, capital gains on estate asset sales, etc.), the executor must file Form 1041, the U.S. Income Tax Return for Estates and Trusts.

Key features of Form 1041:

Due April 15 (or September 30 with an extension) for the first full tax year after death
The estate can deduct income it distributes to beneficiaries — the beneficiaries then report that income on their own returns (Schedule K-1 from the estate tells them how much to report)
Undistributed income retained in the estate is taxed at the estate's rates — which are compressed (the highest rate, 37%, kicks in at just $15,200 of taxable income for 2024)
The executor can choose the estate's fiscal year (doesn't have to be a calendar year) — choosing a non-December fiscal year end can provide additional planning flexibility

Final Paycheck Handling

A practical note on the final paycheck: if the paycheck is made out to the deceased, the estate (through the executor) may need to deposit it in the estate account. The employer will issue a W-2 or 1099 (depending on whether they're an employee or contractor) that identifies the amount as IRD. This amount will be reported by whoever receives it — the estate on Form 1041 or the beneficiary if the estate distributes it to them.

For the complete taxes after death guide, see our taxes after a death guide. For the final Form 1040, see our article on how to file a final tax return for a deceased person.