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.
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.