Income Distribution Deduction: Taxes After a Death (2025 IRS Guide)

This guide covers “Income Distribution Deduction” within taxes after a death. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 559 (2025), Survivors, Executors, and Administrators, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

In figuring taxable income, an estate is generally allowed the same deductions as an individual. Special rules, however, apply to some deductions for an estate. This section includes discussions of those deductions affected by the special rules.

Income Distribution Deduction

An estate is allowed a deduction for the tax year for any income that must be distributed currently and for other amounts that are properly paid, credited, or required to be distributed to beneficiaries. This deduction is limited to the distributable net income of the estate.

For special rules about distributions that apply in figuring the estate's income distribution deduction, see Bequest under Distributions to Beneficiaries, later.

Distributable net income.

Distributable net income (figured on Form 1041, Schedule B) is the estate's taxable income, excluding the income distribution deduction, with the following additional modifications.

Tax-exempt interest.

Tax-exempt interest, including exempt-interest dividends, is included in the distributable net income but is reduced by the following items.

• Expenses not allowed in computing the estate's taxable income because they were attributable to tax-exempt interest (see Expenses allocable to tax-exempt income under Administration Expenses, earlier).

• The portion of tax-exempt interest deemed to have been used to make a charitable contribution. See Charitable Contributions, earlier.

The total tax-exempt interest earned by an estate must be shown on Form 1041, Other Information, line 1. The beneficiary's portion of the tax-exempt interest is shown on Schedule K-1 (Form 1041).

Exemption deduction.

The exemption deduction isn't allowed.

Capital gains.

Capital gains aren't automatically included in distributable net income. However, they can be included in distributable net income if any of the following apply.

• The gain is allocated to income in the accounts of the estate or by notice to the beneficiaries under the terms of the will or by local law.

• The gain is allocated to the corpus or principal of the estate and is actually distributed to the beneficiaries during the tax year.

• The gain is used, under either the terms of the will or the practice of the personal representative, to determine the amount that is distributed or must be distributed.

• Charitable contributions are made out of capital gains.

Generally, when you determine capital gains to be included in distributable net income, the exclusion for gain from the sale or exchange of qualified small business stock isn't taken into account.

Capital losses.

Capital losses are excluded in figuring distributable net income unless they enter into the computation of any capital gain that is distributed or must be distributed during the year.

Separate shares rule.

The separate shares rule must be used if both of the following are true.

• The estate has more than one beneficiary.

• The economic interest of a beneficiary doesn't affect and isn't affected by the economic interest of another beneficiary.

A bequest of a specific sum of money or of property isn't a separate share (see Bequest, later).

If the separate shares rule applies, the separate shares are treated as separate estates for the sole purpose of determining the distributable net income allocable to a share. Each share's distributable net income is based on that share's portion of gross income and any applicable deductions or losses. The personal representative must use a reasonable and equitable method to make the allocations.

Generally, gross income is allocated among the separate shares based on the income each share is entitled to under the will or applicable local law. This includes gross income not received in cash, such as a distributive share of partnership tax items.

If a beneficiary isn't entitled to any of the estate's income, the distributable net income for that beneficiary is zero. The estate can't deduct any distribution made to that beneficiary and the beneficiary doesn't have to include the distribution in its gross income. However, see Income in Respect of a Decedent, later in this discussion.

Example.

Pat's will directs you, the executor, to distribute ABC Corporation stock and all dividends from that stock to Pat’s child, Eli, and the residue of the estate to Pat’s second child, Morgan. The estate has two separate shares consisting of the dividends on the stock left to Eli and the residue of the estate left to Morgan. The distribution of the ABC Corporation stock qualifies as a bequest, so it isn't a separate share.

If any distributions, other than the ABC Corporation stock, are made during the year to either Eli or Morgan, you must determine the distributable net income for each separate share. The distributable net income for Eli's separate share includes only the dividends attributable to the ABC Corporation stock. The distributable net income for Morgan's separate share includes all other income.

Income in respect of a decedent.

This income is allocated among the separate shares that could potentially be funded with these amounts, even if the share isn't entitled to receive any income under the will or applicable local law. This allocation is based on the relative value of each share that could potentially be funded with these amounts.

Example 1.

Frankie’s will directs you, the executor, to divide the residue of the estate (valued at $900,000) equally between Frankie’s two children, Jamie and Ash. Under the will, you must fund Jamie’s share first with the proceeds of Frankie's traditional IRA. The $90,000 balance in the IRA was distributed to the estate during the year. This amount is included in the estate's gross income as income in respect of a decedent and is allocated to the corpus of the estate. The estate has two separate shares, one for the benefit of Jamie and one for the benefit of Ash. If any distributions are made to either Jamie or Ash during the year, then, for purposes of determining the distributable net income for each separate share, the $90,000 of income in respect of a decedent must be allocated only to Jamie's share.

Example 2.

Assume the same facts as in Example 1, except that you must fund Jamie's share first with DEF Corporation stock valued at $300,000, instead of the IRA proceeds. To determine the distributable net income for each separate share, the $90,000 of income in respect of a decedent must be allocated between the two shares to the extent they could potentially be funded with that income. The maximum amount of Jamie's share that could be funded with that income is $150,000 ($450,000 value of share less $300,000 funded with stock). The maximum amount of Ash's share that could be funded is $450,000. Based on the relative values, Jamie's distributable net income includes $22,500 ($150,000/$600,000 x $90,000) of the income in respect of a decedent and Ash's distributable net income includes $67,500 ($450,000/$600,000 x $90,000).

Income required to be distributed currently.

The income distribution deduction includes any income that, under the terms of the decedent's will or by reason of local law, must be distributed currently. This includes an amount that may be paid out of income or corpus (such as an annuity) to the extent it is paid out of income for the tax year. The deduction is allowed to the estate even if the personal representative doesn't make the distribution until a later year or makes no distribution until the final settlement and termination of the estate.

Any other amount paid, credited, or required to be distributed.

Any other amount paid, credited, or required to be distributed is included in the income distribution deduction of the estate only in the year actually paid, credited, or distributed. If there is no specific requirement by local law or by the terms of the will that income earned by the estate during administration be distributed currently, a deduction for distributions to the beneficiaries will be allowed to the estate, but only for the actual distributions during the tax year.

If the personal representative has discretion as to when the income is distributed, the deduction is allowed only in the year of distribution.

The personal representative can elect to treat distributions paid or credited within 65 days after the close of the estate's tax year as having been paid or credited on the last day of that tax year. The election is made by completing Form 1041, Other Information, line 6. If a tax return isn't required, the election is made on a statement filed with the IRS office where the return would have been filed. The election is irrevocable for the tax year and is only effective for the year of the election.

Interest in real estate.

The value of an interest in real estate owned by a decedent, title to which passes directly to the beneficiaries under local law, isn't included as any other amount paid, credited, or required to be distributed.

Property distributed in kind.

If an estate distributes property in kind, the estate's deduction is ordinarily the lesser of its basis in the property or the property's FMV when distributed. However, the deduction is the property's FMV if the estate recognizes gain on the distribution. See Gain or loss on distributions in kind under Income To Include, earlier.

Property is distributed in kind if it satisfies the beneficiary's right to receive another property or amount, such as the income of the estate or a specific dollar amount. It generally includes any noncash distribution other than the following.

• A specific bequest (unless it must be distributed in more than three installments).

• Real property, the title to which passes directly to the beneficiary under local law.

Tax-exempt income not deductible.

The estate can't take an income distribution deduction for any item of distributable net income not included in the estate's gross income.

Example.

An estate has distributable net income of $2,000, consisting of $1,000 of dividends and $1,000 of tax-exempt interest. Distributions to the beneficiary total $1,500. Except for this rule, the income distribution deduction would be $1,500 ($750 of dividends and $750 of tax-exempt interest). However, as the result of this rule, the income distribution deduction is limited to $750, because no deduction is allowed for the tax-exempt interest distributed.

Denial of double deduction.

A deduction can't be claimed twice. If an amount is considered to have been distributed to a beneficiary of an estate in a preceding tax year, it can't again be included in figuring the deduction for the year of the actual distribution.

Example.

The decedent's will provides that the estate must distribute currently all of its income to a beneficiary. For administrative convenience, the personal representative didn't make a distribution of part of the income for the tax year until the first month of the next tax year. The amount must be deducted by the estate in the first tax year, and must be included in the income of the beneficiary in that year. This amount can't be deducted again by the estate in the following year when it is paid to the beneficiary, nor must the beneficiary again include the amount in income in that year.

Charitable contribution.

Any amount allowed as a charitable deduction by the estate in figuring the estate's taxable income can't be claimed again as a deduction for a distribution to a beneficiary.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 559 (2025), Survivors, Executors, and Administrators: Income Tax Return of an Estate—Form 1041 — Exemption and Deductions — Income Distribution Deduction — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.