Personal Injury Payment to a Decedent's Estate

[WhiteOleander]

Taxpayer passed away in 2012. Later in 2012, the estate received a check for about $9100.00 for a settlement for personal injuries received by the decedent. Since this income would not have been taxable to the decedent, would it be taxable to the decedent estate?
I have found several references online saying it is not. But, I can't find anything on the IRS site.

Thanks

[Golden Rocket]

Don't Think So

I don't think it's taxable Miss Oleander, but if you're looking for an authentic source, my opinion wouldn't rank very high on the list.

And I do think it's a legit concern. An estate is a different entity - the rules are entirely different - and recognition of income and expenses cannot safely be assumed to be the same as the antecedent. Then there is this huge amount of discussion related to allocating income and expenses to the decedent and attributing to him/her as if the decedent were still alive for purposes of the final 1040.

Clearly, if the disability is in fact allocable to him/her, then it would be taxable (to the extent it would otherwise be) on the final 1040. Which probably means exempt unless some of this was for salary replacement. If it is received by the estate but NOT allocable to the decedent, then that brings us to your very question.

[Burke]

Income which the estate receives retains the same character as it would have been to the decedent. So, if it were non-taxable to him (no W-2/1099R issued?) then it would not be taxable to the estate. I do not believe a personal injury payment, which is not treated as wages, would be taxable, so I agree with the above. Attorney's usually provide a breakdown of the monies if this is the case, and a W-2 should get issued as well.

The only irregular treatment I know of applies to wages, in which FICA/MC taxes are not assessed if paid after the year of death. But the actual wages would still be taxable income -- to the estate, in that instance.

[WhiteOleander]

Thanks, I was thinking along those lines.

[New York Enrolled Agent]

Income which the estate receives retains the same character as it would have been to the decedent. So, if it were non-taxable to him (no W-2/1099R issued?) then it would not be taxable to the estate. I do not believe a personal injury payment, which is not treated as wages, would be taxable, so I agree with the above.

Just as a reminder - To be excluded from income there must be personal physical injury or physical sickness. IRC 104(a)(2)

[Bees Knees]

The technical term for this is "Income in Respect of a Decedent." TTB, page 21-8 says:

Income in Respect of Decedent (IRD)
IRD is gross income that the decedent had the right to receive
before death that was not paid until after death, including:
• Unpaid wages, commissions, and other compensation.
• Accounts receivable of a sole proprietor.
• IRAs and qualified plans (decedent’s taxable balance).
• Earnings portion of a nonqualified annuity.
• Deferred compensation.
• Interest, dividends, rents, and royalties.
• U.S. Savings Bond interest accrued at death and not reported
on decedent’s tax returns.
• Installment sale payments (decedent’s profit percentage).
• Uncollected proceeds of a sale completed before death.
IRD is taxable to the recipient in the year received. The character
of IRD is the same in the hands of the recipient as it would have
been to the decedent if paid before death. IRD is taxable to the
extent it would have been taxable to the decedent. (IRC §691)

Thus, if the IRD would have been taxable to the decedent, it is taxable to the estate. If the IRD would not have been taxable to the decedent, it is not taxable to the estate. Your citation is IRC § 691(a)(3) which says:

Character of income determined by reference to decedent
The right, described in paragraph (1), to receive an amount shall be treated, in the hands of the estate of the decedent or any person who acquired such right by reason of the death of the decedent, or by bequest, devise, or inheritance from the decedent, as if it had been acquired by the estate or such person in the transaction in which the right to receive the income was originally derived and the amount includible in gross income under paragraph (1) or (2) shall be considered in the hands of the estate or such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount.