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Do You Have to Pay Taxes on a Wrongful Death Settlement?

When you pursue a claim for the wrongful death of your loved one, the only thing likely on your mind is receiving a measure of justice for your loss. However, at some point, the question of taxes will arise. A wrongful death lawsuit may lead to a significant settlement to compensate you for incurred expenses, future income loss and the devastating emotional turmoil you experience. Some of it may be subjected to taxes, while much of it is not.

If you decide to pursue a wrongful death claim or are in the middle of one now, you should understand the impacts of a settlement on your taxes before proceeding. It will help you prepare for how best to use the damages awarded to provide for your needs in the long term. Let’s review the types of potential damages you can pursue in a wrongful death claim before discussing which are taxable and which aren’t.

Understanding the Potential Damages in a Wrongful Death Legal Claim

A wrongful death lawsuit is like other personal injury claims, except that the claimant or the claimant’s representative files on behalf of the deceased. When you ask for damages, you can ask for the same types your loved one would have if they had survived and filed a personal injury case. In addition, you can pursue noneconomic damages on your own behalf. The three categories of damages are: economic, noneconomic and punitive.

What Are Economic Damages in a Wrongful Death Settlement?

The economic damages you can collect are attached to monetary losses. These damages may be for expenses or losses your loved one accrued before passing or future financial losses you will experience because your loved one is no longer with you. The following are economic damages you may receive in a wrongful death settlement:

  • Medical expenses for treatment your loved one received
  • Any therapeutic or rehabilitation expenses your loved one incurred
  • Funeral and cremation or burial expenses
  • The deceased’s lost wages
  • Future income you would have expected had your loved one survived

Regardless of where you live, these economic damages are generally considered allowable in a wrongful death claim. However, it is always good to consult an attorney to ensure you pursue all monetary damages to which you are entitled in your state.

What Are Noneconomic Damages in a Wrongful Death Settlement?

Noneconomic damages don’t come with a direct monetary cost associated. This settlement provides a financial benefit to compensate someone for quality-of-life damages. You can pursue noneconomic damages for your loved one and yourself. If the deceased experienced physical pain and suffering before passing, it is an eligible noneconomic damage.

Likewise, you can pursue a settlement that includes noneconomic damages for your losses, including the following:

  • Emotional trauma
  • Mental anguish
  • Loss of services your loved one would have provided
  • Loss of consortium
  • Loss of companionship

These damages are essentially the same as your loved one would have been able to pursue in a personal injury claim had the individual survived.

What Are Punitive Damages in a Wrongful Death Settlement?

Punitive damages are a special class of settlement award. Not every state allows them, but in those that do, they only apply in cases involving gross negligence or willful intent. Gross negligence implies reckless behavior, such as a person driving well over the speed limit in an area crowded with pedestrians. Deliberate acts intended to cause harm may include arson or premeditated murder.

States that allow punitive damages intend for these awards to punish the person who committed the act. Utah, Texas and Wyoming all enable claimants to pursue punitive damages. However, a lawyer’s assistance is beneficial when determining whether to ask for punitive damages and how much to pursue.

Knowing the Federal Tax Implications of a Wrongful Death Settlement

The federal Internal Revenue Service considers all income taxable. However, the law does provide exceptions for lawsuits and settlements. The federal government recognizes the three categories of damages. Generally, compensatory damages, including economic and noneconomic damages, are not taxable. However, there are exceptions.

If you deducted your loved one’s medical expenses from your taxes, the portion of your settlement that corresponds with those deductions is taxable. Furthermore, noneconomic damages are only exempt when related to the deceased injuries. A wrongful death lawyer can help you determine whether your noneconomic damages are associated with the deceased’s injuries. Still, you may also wish to seek a tax accountant’s assistance to ensure you file your taxes correctly.

The one type of award the IRS almost always considers income is punitive damages. There is one exception. In states that only allow their residents to seek punitive damages in a wrongful death lawsuit, the IRS does not consider punitive damages as income subject to taxation. How much you will be taxed depends on how much of your settlement is taxable and how much other income you earn. Your taxable settlement amount is added to your other income, which may bump you to another tax bracket and change your tax rate.

Knowing the State Tax Implications of a Wrongful Death Settlement

In all but eight states (Texas and Wyoming are among those), residents pay income taxes to the state as well as the federal government. Generally, state income tax laws follow the federal government in what the state considers taxable income in a wrongful death lawsuit. However, verifying what is taxable before you file your income taxes is always good. State tax rates vary, so the amount you pay depends on your total income and your state’s tax rate structure.

Understanding Other Factors That Could Impact Your Settlement

The amount of your settlement available for you to use to support yourself without your loved one will depend on how much you must pay in taxes. Two other factors also impact how much you receive in total. The first is the court and attorney’s fees. Many wrongful death lawyers work on contingency and charge a percentage of your final settlement if you receive compensation. The court fees for your case also come out of your payment.

The second significant factor impacting how much of the award you receive is your state’s personal injury laws. If your case rests on negligence claims, then your loved one’s contributions to the incident that led to the individual’s death are considered before distributing the settlement. Most states follow one of two forms of comparative fault rule.

If you live in one of the 13 states with pure comparative fault laws, your final settlement award depends on how much of the fault is assigned to your loved one. However, even if your loved one were 99% liable, you would still collect 1% of the settlement. In the 33 states that follow modified comparative fault laws, you lose your right to collect any of the settlement if your loved one was more than half at fault.

Hiring a Wrongful Death Lawyer for Your Wrongful Death Claim

Though a lawyer isn’t free, hiring one may significantly increase your chances of recovering a fair settlement for losing your loved one. At Fielding Law, we know the challenges you face in putting the pieces of your life back together after the unexpected loss of someone you love and count on due to another’s negligence or willful acts. We’re here to help ensure you get a fair settlement, protecting your rights every step of the way. We don’t charge any fees unless we win, so get in touch today to find out what we can do for you.