Taxation on Wrongful Death Settlements

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Wrongful Death Lawsuits

Anyone who plans to file a wrongful death lawsuit probably has a lot of questions about the process. A common question is whether the settlement from the lawsuit will be taxed. If the settlement is big enough, the amount that is taxed can be quite sizable, which can affect how appealing filing the lawsuit can be. If nothing else, it is important to know so you do not get in trouble with the IRS. This guide will explain everything you need to know.

Wrongful Death Damages

Wrongful death lawsuits have more types of damages than nearly any other kind of lawsuit. It is possible to be compensated for many different losses, including:

  • Funeral and burial costs
  • Lost wages
  • Emotional distress
  • Pain and suffering of the victim
  • Medical bills
  • Loss of companionship

On top of the compensation for losses, it is also possible for punitive damages to be assigned. These are damages which are meant to act strictly as punishment for the defendant, rather than to compensate for any type of loss.

Taxation

So which of these damages are taxable and which are not? If a type of damages was meant to be compensation for financial loss, then it is not taxable. After all, you are simply being compensation for something that is rightfully your own. As an example, consider the medical bills of the deceased. You are being compensated for an amount of money that was wrongfully spent. It would not make any sense to be taxed for what is rightfully yours simply because of the lawsuit.

On the other hand, anything that is not compensation for a financial loss, such as compensation for emotional distress, loss of companionship, or pain and suffering, is considered to be a form of income by the IRS. This means that taxes need to be paid on these amounts. This also applies to punitive damages.

There is one major exception to this rule, which is lost wages. The defendant may also need to pay for the income that the deceased is no longer able to bring into the household. This income would have been taxed under normal circumstances. The presence of the lawsuit does not make this income immune to taxation, despite being compensation for a financial loss.

It may be a good idea to speak with a wrongful death attorney, like a wrongful death lawyer in Bloomington, IL, or tax professional, for more information about what portions of your settlement you have to report to the IRS and which portions you do not.

Thank you to Pioletti Pioletti & Nichols for their insight into wrongful death law.