In most cases, wrongful death settlements are not taxable under federal law. This is because they are typically categorized as personal injury claims, which are generally excluded from income tax
However, wrongful death settlements are split into sub-categories called damages. Some of these damages are taxable, and some are not. Therefore, it depends on the types of compensation you received after losing a loved one. This area of law contains several caveats. Our wrongful death lawyer can answer any questions you have about your settlement.
Which Damages Could Be Taxable in Wrongful Death Settlements?
In many wrongful death cases, you can receive compensatory damages. These damages account for the losses that family members experienced after their loved one passed away. This could include pain and suffering, loss of companionship, or a lower family income. Most compensatory damages are non-taxable.
Punitive damages, on the other hand, are designed to punish the liable party. These damages are issued less frequently than compensatory damages and only appear in a case when:
- The liable party intended to cause harm
- The liable party behaved in a grossly negligent manner
In general, compensatory damages are not considered taxable, and punitive damages may be taxable, according to the Internal Revenue Service (IRS).
Other Caveats to the Rule
Punitive damages aren’t the only type of taxable damage in a wrongful death case. Other types of damages that could be taxed include:
- Reimbursement for lost wages: If you received compensation for the wages your passed loved one could have earned, this compensation may be taxed.
- Medical expense deductions: If you chose to deduct medical expenses while filing your taxes and later received compensation for these medical expenses, this portion of your settlement could be taxable.
- Emotional distress damages: Emotional distress damages are taxable if they were not the result of a physical injury. Therefore, if you lost a loved one and received emotional distress damages, it’s likely that you’ll need to pay taxes on this portion of your compensation.
Federal and state tax codes are incredibly complex. If you still feel confused about the taxes associated with your wrongful death settlement, consider speaking with our lawyer. They can provide you with clarity and explain which parts of your settlement are taxable.
What Types of Damages Are Non-Taxable?
The following types of wrongful death damages are usually non-taxable:
- Medical expenses (provided they weren’t deducted)
- Pain and suffering a loved one experienced before they passed away
- Mental anguish a loved one experienced before their passing
- Funeral and burial expenses
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Federal Tax Considerations
Knowing the federal tax considerations of a wrongful death settlement is important. This requires understanding the tax treatment under IRS guidelines and exceptions to non-taxability.
Tax Treatment Under IRS Guidelines
The Internal Revenue Service (IRS) does not tax wrongful death settlements. This is because they’re a subcategory of personal injury law.
Exceptions to Non-Taxability
According to the IRS, exceptions exist to non-taxability in wrongful death settlements. If a victim’s death is caused by gross negligence, recklessness or violence, punitive damages may be awarded to the surviving family.
State Tax Considerations
There are no taxes taken from a wrongful death settlement. However, some taxes may be deducted from the total compensation because of state taxes on the victim’s estate.
State-Specific Regulations
State-specific regulations may apply to wrongful death settlements. For example, in Florida, compensation is equally distributed among beneficiaries unless they agree on alternative means to split the money.
In California, the victim’s spouse recovers the largest portion of a wrongful death settlement. Children and other beneficiaries get the remainder in equal amounts. According to Justive.gov, New York follows the same rules.
Variations in Taxation Across States
Variations exist in taxation across states. Although wrongful death settlements are not taxable, other aspects may not be exempt. Punitive damages, estate taxes and lost wages may be subject to taxes.
Implications of Prior Deductions
Prior deductions may impact a total wrongful death settlement. For example, previously recovering compensation for the victim’s medical expenses must be reported on a tax return.
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Interest Accrued on Settlements
Interest accrued on wrongful death settlements is money added from the date of loss to the date compensation was awarded. This is considered interest income, making it subject to taxation.
Strategies for Minimizing Tax Burdens
To make the most out of your wrongful death settlement, you can use certain strategies for minimizing your tax burdens. They involve the timing of settlement payments and structuring settlements.
Timing of Settlement Payments
You can minimize the tax burdens on your wrongful death settlement by considering the timing of the payments. One good way to do this is to consider receiving a lump sum payout. This means you recover all the money up front. Rolling over at least some of your settlement into an IRA protects it from taxes.
Structuring Settlements
Another option for avoiding taxation is to get your wrongful death settlement in a structured settlement. This gives you monthly, quarterly or annual payments. It reduces your tax burden and acquires interest over time.
Categories of Damages in Wrongful Death Settlements
There are different categories of damages in wrongful death settlements. They are economic, noneconomic, punitive and emotional distress damages.
Economic Damages
According to the Maryland General Assembly, economic damages are recoverable in wrongful death settlements. They include the victim’s medical expenses, lost wages and lost earning capacity.
Noneconomic Damages
Noneconomic damages can be recovered in wrongful death claims. They include the victim’s pain and suffering and the surviving family’s loss of consortium, companionship, support, guidance and more.
Punitive Damages
In some wrongful death cases, punitive damages are included in the settlement. Their purpose is to punish defendants for behavior leading to the victim’s death.
Emotional Distress Damages
Certain survivors can recover emotional distress damages in wrongful death claims. This is reserved only for the spouse and children under 25.
How Are Wrongful Death Settlements Paid Out?
Wrongful death settlements are issued in one of two ways, lump sums and structured settlements:
- Lump sums: A lump sum is a singular upfront payment. This means that you’ll receive everything you’re owed in one payment. Once you’ve received this payment, this case is closed.
- Structured settlements: Structured settlements are paid over time. For example, imagine you received a $1 million settlement. Via a structured settlement, you could receive roughly $27,000 a month for three years. Structured settlements don’t need to have the same amount of incremental payments. You could receive a larger payment upfront and then lower payments later.
Who Can Receive a Wrongful Death Settlement?
In Florida, wrongful death compensation is limited to a group known as survivors. They may include:
- The spouse of the person who passed away
- The children of the person who passed away
- The parents of the person who passed away
- A family member dependent on the person who passed away
If you’re planning to file a wrongful death lawsuit, you may have heard the term “personal representative.” When a person passes away in Florida, an individual called the personal presentative is appointed to oversee their finances. This includes filing a wrongful death lawsuit.
Therefore, when you pursue a wrongful death lawsuit, the personal representative must be in charge. However, you can still receive compensation even if you aren’t the personal representative. Once the lawsuit concludes, the settlement will be distributed to qualifying survivors.
How Are Wrongful Death Cases Settled?
Wrongful death cases can be initiated by a lawsuit. However, lawsuits don’t always end in a civil trial. When a lawsuit is filed, these are the two most common outcomes:
- An out-of-court settlement: After a lawsuit’s been filed, both parties involved in a case can negotiate to come to a settlement agreement. This may involve two legal teams or a legal team and a relevant insurer.
- Civil trial: Not all wrongful death cases can be settled through negotiations, though. If both parties fail to agree, the case could proceed to a civil trial. During the trial, both parties will make their case before a judge and jury. Typically, the jury has the final say in the outcome of the case.
Speak With Our Firm About Our Wrongful Death Lawyer Today
At Andrew Pickett Law, we understand how difficult wrongful death cases are. Not only do you have to deal with the grieving process, but you must also familiarize yourself with the labyrinth of federal and state laws that apply to these cases. We’re here to make this process as straightforward as possible. Contact our offices for a free case evaluation. We can provide straightforward answers to your difficult questions.
Frequently Asked Questions
What Type of Settlement is Not Taxable?
Personal injury settlements are not taxable.
Do I Have to Report Settlement Money to the IRS?
You must report settlement money to the IRS.
Are Proceeds from a Wrongful Termination Lawsuit Taxable?
Proceeds from wrongful termination lawsuits are taxable.
Are Awards for Wrongful Death Taxable?
Most awards for wrongful death are not taxable.
Is the Entire Settlement Taxable?
Entire settlements are not taxable, but some portions are.
How to Report Wrongful Death Settlements on Tax Returns?
Part of wrongful death settlements must be reported as income on tax returns. This relates to punitive damages, which are taxable in some states.
What Should Beneficiaries Know Before Accepting a Settlement?
Beneficiaries must know what parts of a settlement are taxable before accepting it. They must also know they can get the money in a lump sum or structured payments.
Need free legal help in Florida?
We specialize in personal injury claims.
