Wrongful death settlements are often large sums of money. When receiving this amount of money, a family may wonder if they have to claim the settlement as income on their tax returns. Typically, a wrongful death settlement will not be considered income. For this reason, in most cases, the amount will not be taxed according to the Internal Revenue Service (IRS). However, there may be some parts of the settlement that may be taxable.
Types of Awards
There are two types of awards provided in wrongful death cases. These are punitive awards and compensatory awards. Awards that are compensatory are typically not taxed by the IRS. This is because these awards are provided to the plaintiff as a way to compensate for the losses suffered by the victim.
Punitive awards are different as these awards are intended as a punishment towards the liable party. These awards are given as a way to discourage others from acting in the same way in the future. Since these awards are not compensating the victim for past losses, the IRS may find punitive awards subject to taxation.
Settlements for wrongful death cases are not considered as income by the IRS. However, when it comes to punitive damages, the IRS will look closely at the case to determine whether or not the damages you receive may be subject to taxation.
There are exceptions to these rules that may apply. State laws may come into play when determining the types of awards a plaintiff is given in a wrongful death case. Some states only allow punitive awards in wrongful death cases. In these states, a punitive award may be exempt from taxes by the IRS.
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What Part of a Wrongful Death Claim Remains Tax-Free?
There are some parts of a wrongful death award that are always tax-free. Some of the forms of compensation that will not be subject to taxes include:
- Compensation for physical illness or a physical injury.
- Compensation for emotional distress as a result of the injury or illness.
- Compensation for any medical expenses. If you deduct medical expenses and then receive reimbursement for these expenses by a settlement or award, you must report the amount as it appeared prior to the deducted amount as income on your taxes the year that you receive the award.
- Compensation for lost wages because of injury or illness.
According to Florida Statutes § 768.21, compensation awarded in wrongful death cases will vary from case to case.
As mentioned, Punitive damages in a wrongful death suit are designed to go above and beyond the initial losses of the wrongful death settlement. For this reason, the amount that is awarded for punitive damages will often be seen as taxable income. Some examples of punitive damages that may be subject to taxes include:
- Emotional distress: If you suffer from emotional distress as a direct result of the illness or injury, awards for suffering classify as non-taxable income. Yet, if the distress did not result from the injury, it will classify as taxable income.
- Invasion of Privacy: An invasion of privacy does not directly relate to the costs resulting from the injury, so courts consider it a punitive award subject to taxes.
- Discrimination: Awards following a loss of wages classify as compensatory, taxable income.
- Harassment: If the harassment caused an injury or emotional stress, the IRS might not collect taxes on it.
Every case is unique, and there are variables that may come into play when determining whether or not the awards given in a wrongful death suit will be taxable.
How a Wrongful Death Settlement is Not Considered Income
It is possible to file more than one claim against a defendant. You may file a wrongful death claim against the defendant as well as other claims that do not pertain to the wrongful death claim. Wrongful death claims typically come with higher compensation than other claims. If you are filing multiple claims against a defendant, it may be worth it to clarify which settlement amounts go with each particular claim. This can help ensure that you do not have to pay taxes on the settlement amount for the wrongful death claim. The other settlement amounts may be subject to taxation.
Call Ben Crump Law, PLLC Today
If you have any questions about whether a wrongful death settlement is considered income or if you lost a loved one as the direct negligence of another person or entity, contact Ben Crump Law, PLLC at 800-593-3443 to discuss your case. We will give you a free consultation about your legal options for collecting your compensation from your wrongful death case.