Are Wrongful Death Claim Settlements Taxable?

Johnson, Zegen, Scott & Williams

One of the toughest parts of experiencing the death of a loved one is the legal aftermath that can ensue. But suppose the death was due to another person’s negligence, such as a wrongful death, medical malpractice, or an at-fault car accident.

In that case, the dependent family of the deceased may have the legal right to pursue a wrongful death claim. If that claim is successful and results in a wrongful death claim settlement, the question arises: is this settlement taxable?

Thankfully, wrongful death claim settlements are not typically taxable. This is because the IRS considers the settlement payments to be received in exchange for damages, meaning that the money received is not considered income and, as such, is not taxable.

One exception to this tax rule is if the wrongful death money is given to cover lost wages, estates, or investments. In these circumstances, the law states that any interest received on the money must be reported as income.

It is important to remember that the above taxation rules only apply to the settlement payment itself, not to investments made using the funds. For instance, you can use the settlement money to purchase stocks, bonds, or mutual funds, which would, in turn, be subject to the different taxation rules that apply to such investments.

In this article, we will cover everything that you need to know about wrongful death settlement taxation.

Receiving a Wrongful Death Settlement

Wrongful death claims are civil lawsuits filed when a person dies due to the misconduct or negligence of another party, for example, dog bite injury settlements. The surviving family members can bring a claim for damages, including medical bills, lost wages, funeral expenses, and pain and suffering damages in personal injury.

Wrongful death lawsuits are often filed against insurance companies because the deceased had life insurance policies. These cases are called wrongful death actions.

If you win, you recover money for the loss of income and support you experienced during your lifetime. You also receive compensation for pain and suffering, medical expenses, funeral costs, lost wages, and emotional distress.

However, it is possible to obtain a tax-free wrongful death settlement. This type of settlement occurs when the plaintiff receives a monetary award in exchange for waiving his or her claim for punitive damages and/or compensatory damages.

To qualify for a tax-free wrongful settlement, a person who suffered financial losses due to the decedent’s death must be clearly identified.

For example, suppose someone dies in a car accident and leaves behind a spouse, children, parents, siblings, grandparents, etc. In that case, the family members could file a lawsuit against the driver’s insurance company. If the family wins, they would likely seek punitive damages and/or economic damages.

However, if the family agrees to waive those types of claims, they would still be eligible for a tax-free settlement.

Understanding the Taxable Portions of Your Settlement

According to the IRS, “compensation for emotional distress is never subject to federal income taxation.” However, the entirety of your settlement might not be compensation for emotional distress, and states have their own taxation laws.

So how can you know if you need to report the money as income? And what about medical bills, lost wages, funeral costs, or other damages that go toward making up for the loss of someone’s life?

If you’re filing a claim for wrongful death, it may not be guaranteed that funds for these expenses won’t be taxed. If you think you might owe taxes on the wrongful death settlement, speak to a tax attorney. They can help determine whether you must pay taxes on any or all of the money received.

Estate taxes

It’s important to remember that the IRS can audit any wrongful death claim settlement and may seek to collect any taxes due. It’s also important to note that the IRS may treat the settlement differently if the deceased person had an estate.

In this case, the settlement may be subject to estate taxes, depending on the value of the estate.  Therefore, it’s essential that you keep accurate records and file necessary tax forms in a timely manner. Speak to a professional if you are at all unsure about this process.

How Are Wrongful Death Settlements Paid?

Wrongful death settlements are paid based on the amount of monetary damage caused by the death itself. There are two different types of damages that you can usually recover: economic damages and non-economic damages.

Economic damages include medical bills, funeral costs, and lost wages. Non-economic damages include things like loss of companionship, grief, and mental anguish. They are usually awarded in addition to the economic damages.

How Can an Attorney Help?

Wrongful death cases are complicated, and there are a number of things that can go wrong along the way. It can be overwhelming to think of having to deal with insurance companies, medical professionals, law enforcement officials, and others involved in your loved one’s death.

You want justice for your loss, but you don’t want to spend hours or days trying to figure out how to navigate the system. And you certainly don’t want to pay someone else to do it for you.

Wrongful death lawyers are dedicated to helping families like yours recover compensation for the pain and suffering caused by the death of a family member. In a successful case, you could receive a settlement check that covers all related expenses, including funeral costs, lost wages, medical bills, and more.

Conclusion

In general, wrongful death claims are generally not taxable, but it’s important to be aware of the potential tax implications. This is particularly true if you received a large settlement or if the deceased person had an estate. 

It’s also important to keep accurate records and file necessary tax forms in a timely manner to avoid any potential penalties or interest.

In any case, it is advisable to seek out legal or financial advice from a tax professional to help make sure you are in compliance with the law and making the best decision for your family when it comes to your wrongful death claim settlement. Visit us at jzswlaw.com to book an appointment right away.

 

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