Is the settlement you can obtain in a wrongful death claim taxable?

According to the IRS the settlement you receive in a wrongful death lawsuit is untaxable. However, certain circumstances can complicate this.

The settlement you receive in a wrongful death lawsuit remains untaxable, according to the Internal Revenue Service (IRS). Because it classifies it as part of a claim that stemmed from personal injuries or physical illness, the IRS makes the wrongful death settlement non-taxable.

However, specific circumstances can complicate the question of whether your wrongful death settlements are classified as taxable. The IRS does not tax your wrongful death settlement. Under certain circumstances, they may tax other settlement portions or amounts, including:

  • the part of your settlement you received for medical expenses deducted from your income
  • some parts of a settlement you receive for emotional distress if it did not result from personal injury or illness
  • proceeds from an insurance or lawsuit settlement that classifies as punitive damages

The way courts usually assign portions of a wrongful death award may impact the settlement taxability of a wrongful death lawsuit. Florida Statute 768.21 defines how the court awards losses in a lawsuit for wrongful death:

  • loss of financial support caused by your family member's wrongful death
  • loss of future financial contribution your loved one would have made
  • loss of the companionship of a spouse or parent caused by their wrongful death
  • emotional anguish resulting from the loss of a loved one due to wrongful death
  • money you spent on funeral expenses and burial costs for your loved one

Awards for punitive damages might make parts of your settlement taxable. The court awards punitive damages when the individual who caused the injuries or death of your loved one did so without regard for how their action might affect others. Punitive damages are taxable. Their purpose is to punish the defendant rather than to recover money for your losses. Because of this, it would be more advantageous to allocate more of the settlement for compensatory damages, which can refer to mental pain and suffering, than for punitive damages. For example, if your settlement is $1 million in compensatory damages and $8 million in punitive damages, you will have to pay taxes on the $8 million.

Usually, wrongful death lawsuit settlements are not considered income, which means they are not taxable. The IRS applies "26 CFR § 1.104-1 Compensation for injuries or sickness" to the money damages people receive in wrongful death cases, as they are for personal injuries or sickness. Finally, if part of your settlement is for emotional distress that was not the consequence of personal injury or illness, that part of the settlement could be taxable.

How can The Law Offices of Sean M. Cleary help?

The Law Offices of Sean M. Cleary provides quality legal assistance to family members who lost a loved one due to negligence. We can help you file a wrongful death claim regardless of the complexity of your case, as our attorney has over 20 years of professional experience. So, if you are in this unfortunate situation, do not hesitate to give us a call.

Disclaimer: Please note that the information provided on this site is not formal legal advice, also the site does not allow you to form an attorney-client relationship.