Are Wrongful Death Settlements Taxable?

There are only two things that are certain in life – death and taxes, and unfortunately, a wrongful death lawsuit settlement deals with both of these issues.

A wrongful death lawsuit arises when one party fails to uphold their legal duty of care towards someone else, and that breach of duty results in death. The loved ones of that party have a legal right to pursue a claim for compensation from the responsible party.

To determine “Are wrongful death settlements taxable?” depends on several factors. Tax laws address this issue, but it’s complicated. Some of your settlements might be taxable, while another portion could be exempt. We’ll go into greater detail about how your settlement might be impacted by tax laws below.

Understanding Wrongful Death Settlement Payouts

In order to receive a wrongful death settlement, you’ll first need to pursue a claim. You’ll need to collect evidence that shows what happened in your loved one’s accident and that the other party had a legal responsibility to provide for your loved one’s care. You also need to collect documentation that proves the extent of your losses. This should include things like burial expenses, a loss of financial support, emotional distress, and more.

Your settlement payout should accurately reflect the extent of your and your family’s losses as a result of the unexpected passing of your loved one.

How You Will Receive Your Payout

The average wrongful death settlement is paid out in one lump sum. This amount is paid to the family in one check, giving everyone immediate access to the full settlement.

You can also receive your wrongful death personal injury compensation in a structured settlement. This type of payment arrangement allows you to receive regular payments over an agreed-upon period of time. You might want to get some of your settlement annually, bi-annually, or monthly. This type of arrangement allows you and your family to rely on regular future financial contributions.

Are Wrongful Death Settlements Taxable?

To determine whether you do you pay taxes on wrongful death settlements will depend on your state’s income tax and how you received the payout. Some portions of your settlement could be taxable, while others might not be. What’s more, your state’s income laws will play a role in whether or not your settlement will be taxable. Another factor that you’ll need to consider is how you receive your payout. Taxes will be levied on your settlement based on when you receive them, so if you get payouts via a structured settlement over several years, you’ll get taxed less than if you received it in a lump sum.

State Income Tax Laws

In general, punitive damages will not be excluded from your taxable gross income. State laws will come into play with this specific form of compensation, though. The court’s decision in Burford v. United States explained that some state statutes allow for punitive damages specifically in wrongful death claims.

Taxable vs. Non-Taxable Portions of a Settlement

Your settlement award should cover all the associated with losing your loved one. That includes compensatory damages, which involve both economic and economic damages. Depending on the circumstances, you might also get punitive damages or damages for emotional distress.

IRS Rule 1.104-1 outlines that a taxpayer’s gross income won’t include damages you receive for personal physical injuries or illnesses. This compensation includes all damages whether they’re received through lump sums or periodic payments.

An important distinction, though, is that your settlement award could have non-taxable portions if some of your settlement is for punitive damages or damages for emotional distress that weren’t specifically tied to physical damages. We’ll get into defining that further below.

Compensation for Personal Injuries or Illnesses

Your financial compensation will, in large part, be directly for your loved one’s physical injuries that led to the fatality. That means you’ll mostly have a non-taxable settlement. All compensation that’s for your loved one’s medical bills, burial expenses, funeral costs, loss of financial support, and more will be part of this non-taxable portion.

Punitive Damages and Damages for Emotional Distress

IRS laws specify that an emotional distress settlement that stems from a physical injury isn’t taxable, but mental and emotional anguish that stems from a non-physical injury is taxable. For instance, if your compensation is stemming from permanent scarring, then it won’t be taxable. If your compensation is for something like defamation, then it will be taxable.

Punitive damages are always taxable. The logic behind this is that punitive damages are an additional economic award provided to you that goes above and beyond your financial losses. There is one small exception, though, if your state has specific statutes that allow for a wrongful death exemption. Speak to a local wrongful death attorney to find out more about the laws in your area.

How to Report a Wrongful Death Settlement on Taxes

Many forms of your settlement, like the compensation you receive to cover funeral costs and the overall loss of financial support, won’t need to be reported on your taxes. The amount that does need to be reported can be put under "other income" on federal tax forms. If you want to know more, you should seek professional legal help.

Are you currently considering filing a wrongful death claim? If so, then it’s important to weigh out the costs associated with it. In general, most of your settlement is non-taxable, but a portion could be taxed. 

When it comes to legal representation, most wrongful death attorneys use a contingency fee payment schedule, so you won’t have to pay anything upfront. Your lawyer will only get paid if and when you do.

If you’re ready to move forward with your claim, then schedule a free case evaluation with our team here at Kermani LLP now.