Personal Injury Lawyer
With many legal issues, the question itself may be simple and straightforward, but the answer seldom is. Unfortunately, such is the case with regard to the taxability of wrongful death damages.
In general, the Internal Revenue Service, per IRS Rule 1.104-1, exempts wrongful death damages from federal taxation. Why? Because it sees them as resulting from a claim for personal injury. This general rule has several exceptions that could make portions of your wrongful death damages taxable at the federal level, though. For instance, the following portions of your settlement or jury award could be considered income and therefore taxable:
- The portion you receive for reimbursement of your loved one’s medical bills and expenses that you paid, but already took as deductions from income in prior years
- The portion you receive for mental and emotional distress and anguish you suffered as a result of your loved one’s death
- The portion you receive as punitive damages
On the other hand, the IRS has special rules applying to punitive damages in wrongful death cases. IRC 104(c) specifically excludes them for federal taxation purposes. However, the IRS has the authority to look to your particular state and the way in which it apportions wrongful death settlements and awards. In addition, it can challenge the structure of any such awards if it believes the ratio of compensatory damages to punitive damages fails to reflect the award’s “economic substance.”
Should you discover that some portion(s) of your wrongful death damages qualify as income, you will need to report that as “other income” on your federal tax return.
Even in cases where you need to pay no federal income taxes on your wrongful death damages, you still may have to pay state income taxes on them. Again, it depends on the laws of your particular state.
California law, for instance, excludes wrongful death damages from state taxation because California limits these damages to compensatory only. If, on the other hand, you file and prevail in a survival action rather than a wrongful death action, you likely will have to pay state income taxes on that portion of your settlement or jury award attributable to punitive damages.
Getting Advice and Counsel from a Wrongful Death Lawyer
Given the conflicting laws and regulations applicable to the taxation of wrongful death settlements and awards from state to state, your wisest strategy consists of seeking the advice, counsel, and representation of a local lawyer experienced in such cases.