A very common question in wrongful death cases is whether or not the amount awarded in the case is taxed. This can make a huge difference in large cases. In fact, it could be the factor that determines whether or not it is worth the time and effort to file a lawsuit and pursue legal action for months or even years. It turns out that the answer to this question is incredibly complex. This guide will explain the answer and provide you with more information.
The first thing you need to understand to answer this question is how damages are categorized. There are three types of damages:
- Special compensatory damages – Financial losses
- General compensatory damages – Non-financial suffering
- Punitive damages – Additional punishment for the defendant.
If a claim is meant to be compensation for an amount of money you or the deceased was forced to spend as a result of the injury, it will be special compensatory damages. If it is compensation for a form of suffering, such as a painful experience or emotional turmoil, it will be general compensatory damages. Punitive damages are only assigned by the judge, rather than claimed by the plaintiff, and simply act as punishment for the defendant.
So, now that you understand damages, you can understand how taxation works. The simple answer is some types of damages are considered income, which is taxed, while other types of damages are considered compensation for a financial loss, which is not taxed.
For example, imagine that someone files a wrongful death lawsuit after a loved one is killed in a car accident. One claim might be for the damage to the vehicle. The value of the vehicle would not have been taxed had the accident not happened, so compensation for damage to the vehicle is also not taxed. However, a claim for pain and suffering would be taxed, as this is considered a form of income, rather than compensation. Although it is not always true, special damages are usually not taxed, while general and punitive damages usually are taxed.
There is one major exception, which is claims involving lost paychecks. This is special damage because it is compensation for a financial loss. However, the paycheck would have been taxed, meaning the claim for lost wages must also be taxed.
If you receive no taxable compensation in the lawsuit, you do not need to report anything on your taxes. If any amount is taxable, you must report all of it and create a deductible for the non-taxable portions. A tax professional or wrongful death attorney, like a wrongful death attorney from Lakewood, FL, can help you handle this.
Thank you to the experts at David & Philpot, PL, for their input into personal injury law.