Are wrongful death settlements taxable?
To answer that question, we have to look at the two factors that determine the settlement amount in these cases: compensatory damages and punitive damages.
- Compensatory damages: this is a monetary award given to the victim’s family to compensate them for medical expenses, funeral and burial costs, all costs incurred as a result of the wrongful death. This can also include lost income and estimates of future income had the loved-one not fallen victim to the defendant’s neglect. Lost income can be calculated based upon the victim’s age at the time of death, his/her average life expectancy if not for their untimely death and the annual earning potential of the victim multiplied by anticipated years remaining in the workforce. Other factors include the non-economic household contributions made by the family member and the loss of companionship their death has on the family.
- Punitive damages: this is monetary compensation awarded when it is proven that, if not for the offending party’s intentional, negligent or reckless actions, the victim would not have died. This award is intended to be disciplinary in nature and is meant to dissuade future similar acts. Punitive damages are imposed in addition to compensatory damages.
The Internal Revenue Service (IRS) has ruled that, in general, compensatory damages are not generally taxable. The code does point out that in some cases, if monies for medical expenses were itemized and claimed on prior years taxes, those amounts would become taxable upon receipt of the settlement. Punitive damages may be taxable to some extent as well. It is important to discuss this with your attorney to determine exactly how the law applies to your specific situation due to the intricacies associated with wrongful death settlements and tax liability.
The settlement may also affect estate taxes, so again, it is imperative to speak with an attorney and a tax professional to insure you are insulated against undue liability.