Are Wrongful Death Lawsuit Settlements Taxable?
Every day, people die due to the negligence or wrongdoing of others. Although losing a loved one is always difficult, losing a family member to a wrongful death compounds the grief and complications stemming from their death. As discussed in the book “Unthinkable,” surviving family members may face unexpected expenses, such as medical expenses, burial costs, and loss of income. These financial issues and grief may prompt a spouse or another family member to hire a wrongful death lawyer and seek compensatory damages after their loved one’s death.
Receiving a financial settlement presents some challenges. The recipients may have concerns about managing the settlement amount and wonder, “Are wrongful death settlements taxable?” Typically, per IRS Rule 1.104-1, the federal government does not charge taxes on wrongful death settlements. However, there are some exceptions surviving family members should be aware of when filing their wrongful death lawsuits.
What could be taxed in a wrongful death settlement?
Plaintiffs may receive different types of damages in their wrongful death settlement. Economic damages refer to calculable expenses related to their loved one’s death, such as medical bills, property damage costs, and funeral expenses. These damages aren’t classified as income because they’re compensation for expenses from the person’s death.
Compensation for loss of consortium and pain and suffering are classified as non-economic damages. Like economic damages, the federal government doesn’t classify these damages as income and doesn’t require family members to pay taxes on them.
In some cases, plaintiffs can seek punitive damages. It’s possible to seek punitive damages if the at-fault party acted deliberately and dangerously without regard for the safety of others. These damages are not classified as compensation, which is why punitive damages are taxable.
Are there any exceptions to the taxation of wrongful death settlements?
The Internal Revenue Service (IRS) can tax portions of a wrongful death settlement for economic damages. Specifically, damages for loss of income may be taxable. The IRS can also review your settlement and question the amounts awarded. The settlement must meet IRS standards to qualify as non-taxable.
Plaintiffs should note that the IRS handles federal taxes. Although most states follow federal guidelines, some may tax wrongful death settlements. Check your state’s tax laws to verify whether your settlement will be considered taxable income.
You may also receive interest on the settlement awarded. For example, if the defendant appeals the judgment, they won’t have to make payments until the appeal is resolved. If they lose their appeal, they may be charged interest on the amount awarded, and the interest may be taxable.
How are wrongful death settlements determined?
Wrongful death judgments involve multiple steps. Eligible family members must take steps to hire wrongful death lawyers and pursue a wrongful death claim before the statute of limitations expires. In Colorado, family members have two years from the date of their loved one’s death to file a wrongful death lawsuit.
The wrongful death legal team will investigate the case and gather relevant evidence. They may negotiate with the defendants’ insurance companies to reach a settlement or present their evidence in court.
When the legal team negotiates a settlement, the parties agree to the payout amounts. While they may calculate economic damages based on receipts, several factors affect the amount of non-economic damages awarded. The severity of the loss and its impact are critical factors. Juries determine how much to award in cases that go to trial by considering the nature of the loss and the impact on the plaintiffs when determining settlement amounts.
Plaintiffs may also opt for a structured settlement instead of a lump sum payment as part of their settlement terms. Structured settlements split judgments into multiple payments paid out over several years.
Are there ways to minimize taxes on a wrongful death settlement?
Plaintiffs receiving economic and non-economic damages may not need to take steps to reduce taxes because their judgments aren’t taxable. However, those receiving punitive damages may use a structured settlement to reduce the taxable income received each year. Controlling their taxable income amount enables them to keep their income within a favorable tax bracket, reducing their tax burden.
Contact an experienced wrongful death attorney for help with your case.
The legal experts with Elite Litigation Group can guide you through your wrongful death lawsuit. When we pursue wrongful death cases, we strive to get the maximum compensation possible for our clients. We’ll consider every eligible cost when calculating the amount of economic and non-economic damages, and you won’t have to worry about proving the defendant’s willful wrongdoing or negligence. We’ll investigate and gather evidence to prove your case in court. We’ll also answer your questions and advise you of your legal options at every step throughout the process.
Losing a loved one is devastating. The Elite Litigation Group understands how tragedy impacts survivors, and we’re there to support our clients throughout the legal process while they cope with their loss.
Contact our wrongful death attorneys for a free consultation to determine if you have grounds to pursue a wrongful death case. We’ll review your case and explain your options.
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Bieber, C. (2022). What is Loss of Consortium?