Wrongful Death Settlements and Taxes
If you have recently received a settlement from a wrongful death lawsuit, you may have concerns regarding how this will affect your tax situation at the end of the year. Because my of these settlements include large amounts, those who have been awarded damages may fear that it will cause them to owe a large amount of tax on the proceeds. However, many wrongful death settlements are not taxable by the IRS.
What Is Wrongful Death?
Wrongful death occurs when someone’s life has ended as a result of a person or company’s negligence or misconduct. The surviving family members may file a lawsuit against the person or company, claiming that they were responsible for the decedent’s demise. The case may be settled outside of court, or a judge may have the final say when it comes to awarding damages.
Per the IRS, if you receive proceeds from a lawsuit due to physical illness or injury, those funds are non-taxable. Wrongful death settlements are included in this because it is the physical illness or injury caused by an outside party that resulted in death. For this exemption to apply, however, the settlement is required to be in the form of compensation awarded for the pain and suffering caused. This is known as compensatory damages. These damages are specifically meant to compensate someone for a loss that has already happened.
Punitive damages, however, are subject to income tax. Punitive damages are awarded when the liable person or organization was found to have intentional, reckless, or negligent actions that led to the victim’s death. These types of damages are meant to serve as a penalty of sorts to deter similar acts in the future.
Federal Tax Return
As mentioned previously, compensatory proceeds are not subject to tax. As such, they do not affect your federal tax return. However, if you receive compensation for other damages, those payments are subject to income tax because they are considered income. Examples of awarded damages that may be subject to income tax include:
- A portion of the settlement that was awarded due to the emotional distress caused to the family
- A portion of a settlement that was awarded for punitive damages
- A portion of a settlement that was awarded to cover lost wages
If someone you love has recently passed away and you believe it was due to the negligence or intentional acts of another party, be sure to contact a qualified wrongful death attorney, like a Wrongful Death Lawyer in Salt Lake City, UT, to discuss your options.
Thank you to the experts at Rasmussen & Miner for their insight into wrongful death and the law.