If your loved one passes away due to another party’s negligence, you may have the right to file a wrongful death claim. A successful case can result in financial compensation that may total thousands or even millions of dollars.
But if you don’t know whether your settlement is considered income, it’s hard to know whether you have to report it on your taxes. Read on to learn if and when you have to pay taxes on a wrongful death settlement.
How Are Wrongful Death Settlements Paid?
Depending on the type of claim you file, you could receive one or two different categories of financial compensation. Take a look at the two types of damages you could get from a wrongful death settlement.
Economic Damages for Wrongful Death Claims
This type of compensation is designed to help you recover the financial losses that you experienced due to your loved one’s wrongful death. Economic damages typically cover:
- Medical expenses and hospital bills that your loved one incurred due to the other party’s negligence
- Physical injuries or illnesses and treatment for related emotional distress that your loved one experienced due to the other party’s negligence prior to death
- Funeral and burial costs incurred after your loved one’s passing
- Relevant expenses that have definite dollar amounts
Non-Economic Damages for Wrongful Death Claims
In contrast, non-economic damages can be harder to quantify since they aren’t associated with concrete amounts. These damages generally cover:
- Pain, suffering, trauma and emotional distress that you experienced due to your loved one’s injuries, illness, and subsequent death
- Loss of nurturing, training, companionship, or guidance that your loved one would have provided
Punitive Damages for Wrongful Death Claims
In some cases, you may also receive punitive damages as part of your wrongful death settlement. This compensation goes beyond measurable financial losses and essentially punishes the defendant for their negligent actions. They generally apply only to cases involving gross negligence.
Is a Wrongful Death Settlement Taxable?
When it comes to settlements for wrongful death claims, some compensation is taxable and some is tax-free. In most cases, the taxability depends on whether the compensation can be considered income.
Taxable Wrongful Death Settlements
As a general rule, if the Internal Revenue Service (IRS) considers the settlement income, then it’s subject to federal taxes. That means virtually all punitive damages are taxable. Because punitive damages are issued to punish the defendant instead of to compensate you for the wrongful death of a loved one, they typically qualify as income.
In addition, some compensatory, or economic and non-economic damages, are also considered income. For example, an economic settlement that includes loss of income or a non-economic settlement like payment for pain and suffering are generally taxable since it would be subject to federal taxes if paid to the deceased person in normal circumstances.
Tax-Free Wrongful Death Settlements
Although punitive damages are almost always taxable, most economic and non-economic damages are tax-free. That’s because they serve as direct compensation for loss of life. For example, compensation for medical bills, funeral costs, treatment for emotional distress, and loss of nurturing are all non-taxable.
Special Taxation Rules for Select Wrongful Death Settlements
In some cases, the tax rules for wrongful death settlements aren’t as straightforward as they normally seem. That’s because the IRS has legal grounds to analyze and question the compensation you received from your settlement. If the agency determines that the ratio of economic and non-economic to punitive damages doesn’t accurately reflect the size of the settlement, it may challenge the settlement’s structure.
State Taxes for Wrongful Death Settlements
Most states follow federal guidelines for taxing wrongful death settlements. States that collect income tax may have the right to tax any portion of your settlement that qualifies as income. As with federal taxes, most economic and non-economic damages are exempt from state taxes.
How Do I File a Wrongful Death Claim?
Wrongful death claims generally involve complex legal arguments, which means it’s in your best interest to partner with a knowledgeable attorney. To get the best possible outcome from your case, you need a legal team you can trust to make a strong case and offer informed advice every step of the way.
At Janet, Janet & Suggs, our wrongful death lawyers have extensive experience pursuing high-level cases and winning positive results. The outcomes of our wrongful death cases include a $2 million verdict for the wrongful death of a child due to a medication overdose. Although prior results can’t guarantee future outcomes, you can rest assured that we’re committed to helping you get the justice you deserve.If your loved one passed away due to the negligence of another party, you aren’t alone. The experienced team at Janet, Janet & Suggs is here to help you file a wrongful death claim and get your rightful compensation. Contact us for a free case evaluation to learn more about the strength of your claim and find out how to file a wrongful death case.