In general, wrongful death settlements are not taxable, but as with any law, there are some exceptions. Depending on how the settlement award is allocated and what is reported on the 1099 form you are issued, some portions of the settlement may be subject to being taxed.
When you come into a settlement or large sum of money from a wrongful death lawsuit award, it can help you to rebuild your life and get a fresh start after a tragic loss. Learn more about the taxable portions of a wrongful death settlement, so you aren’t surprised by a nasty tax bill from the IRS.
Tax Laws About Damages Received on Account of Personal Physical Injuries or Physical Sickness
According to the IRS, the money you receive in a wrongful death lawsuit isn’t considered taxable income as long as the damages award is for personal injury or physical sickness. This pertains to personal injury claims as well.
Some portions of a wrongful death lawsuit may be taxed separately, however. Under the following conditions, these parts of a settlement may be classified as taxable income:
- Any money awarded that is allocated for punitive damages is taxable. Punitive damages are awarded in cases where the defendant’s behavior is considered intentional or grossly negligent.
- Emotional distress allocations of the settlement or award can be taxed if the distress wasn’t due to a personal injury or illness. For example, awards for emotional distress due to defamation of character would be taxable because there was no physical injury.
- The settlement portion allocated for the medical costs you have already deducted from your income tax filings in previous years would be taxed. Since you already claimed a deduction on your taxes for the bills you paid, you would need to pay tax on the money you are now receiving to compensate you for the medical bills.
- Accrued interest may be a factor if the case is appealed. If you are awarded prejudgement or post-judgement interest, that portion of your settlement is considered income.
It should be noted that if your claim was against a corporate entity or your punitive damages are a large part of your settlement package, it could have substantial tax implications. You may be able to work with your wrongful death attorney and a tax advisor during the settlement negotiations to attempt to reduce these consequences.
The Court May Designate the Assignment of Wrongful Death Losses
How your losses are awarded can make a difference in the taxable portion of your settlement. Different states have different rules regarding the assignment of wrongful death losses so it is important to learn how it is defined in your state.
How to Minimize the Taxable Income on Wrongful Death Settlements
How the damages are allocated by the judge will be what the IRS looks at when they review your tax return. The best way to reduce the taxable portion of your settlement is to ask your lawyer to ensure that the award is allocated to minimize the tax impact.
If the compensatory damages are allocated as separate from the punitive damages, your tax consequences can be reduced.
You can also ask that the settlement is spread out over time so you are not skyrocketed into a much higher tax bracket. Receiving payments over time is another way to ensure that you and your family are cared for and that the money will last as long as possible.
Types of Damages That May Be Awarded in a Texas Wrongful Death Settlement
In a Texas wrongful death case, the plaintiff’s economic and non-economic losses are referred to as damages. The deceased person’s survivors, such as a spouse, child, or parents can be compensated for the losses they suffered in relation to the death.
When a loved one is lost, the plaintiff is generally the spouse or children of the deceased and they may be entitled to receive financial compensation for:
- Loss of earning capacity
- Medical expenses related to care received prior to death
- The loss of care, services, support, maintenance, and counsel
- The anguish and emotional pain of the survivors
- Loss of love, loss of companionship, loss of comfort and society
- Loss of inheritance, the amount the person would have saved if they had lived
- Punitive or exemplary damages
- Funeral and burial costs
A wrongful death attorney can evaluate your claim and provide you with a projected calculation of the damages based on the actual financial value of your losses and the results of previous similar cases.
Contact a Lawyer to Learn More About Settlement Income
Wrongful death cases are delicate situations that can result in substantial financial awards. The compensation can be life-changing and the end to financial hardships for many. It’s important to ensure that your lawyer handles the negotiations or the court case with precision so that your settlement can be a benefit that serves you for as long as possible.
The Buzbee Law Firm’s wrongful death attorneys understand the tax implications and the impact a large financial award can have. If you have questions about what part of a wrongful death settlement can be considered as income, or if you are considering a wrongful death claim, don’t hesitate to contact us.