When a loved one dies because another individual was negligent, it can be extra devastating. Being involved in a wrongful death case could be one way you can seek closure, at least financially. Is your settlement going to be taxed? In most cases, no. You are responsible to make up the difference in income, pay for property damage, pay your loved one’s medical bills, settle funeral and burial costs, and a variety of other actions after your loved one dies, and you shouldn’t have to pay a tax on that.
The IRS’s Take on Taxes and Wrongful Death
The IRS says any settlement you receive for an injury or physical illness is not taxable as long as it is true compensation. A wrongful death settlement would be considered one of these situations, but the damages have to be considered compensatory. In many wrongful death cases, punitive damages are also awarded, and those are not considered as compensation, but rather a way to further punish the guilty party.
How Each State Views Wrongful Death Settlement Taxes
The state in which you live is going to have a different view on wrongful death settlements and taxes. That view varies by state, so you should speak with a CPA or wrongful death attorney to find out how the state in which you live will handle the situation.
Paying a Settlement and Deducting It
If you are a business owner who has been ordered to pay a wrongful death settlement, there’s something you’ll need to consider. If taxes don’t come out of the wrongful death suit, you can’t deduct them as a business expense either.
How Your Federal Tax Return Could Be Impacted
Because your wrongful death settlement isn’t taxed, it won’t have an impact on your federal return. Keep in mind, there could have been other damages awarded during your lawsuit. This includes punitive damages, lost wages, emotional distress and other types of damages. These are often considered income and will be taxed. This means they’ll affect your federal tax return as you’ll report them as income.
Any time you are dealing with large sums of money, it can benefit you to hire an attorney. Whether you’ve got the wrongful death settlement figured out or need more information, a wrongful death attorney is always just a phone call away.