In the United States, the Internal Revenue Service (IRS) generally does not tax wrongful death awards if they are compensation for an injury. This exemption from taxes applies to compensation for medical expenses, the pain and suffering the decedent suffered, and funeral expenses, among other things. Punitive damages, however, are taxable, as they are meant to deter future bad behavior, rather than serve as compensation to the family.
Who Receives the Proceeds of a Wrongful Death Lawsuit?
The proceeds of a wrongful death lawsuit go to the deceased person’s estate or surviving family members. The funds help make the family whole after the loss of a loved one. In every state, a spouse can file a wrongful death lawsuit, and parents can file a lawsuit after the loss of a minor child. State laws vary on whether parents can file on behalf of a deceased adult child and whether adult children can file after the loss of a parent.
Compensatory Damages Versus Punitive Damages
Some of these settlements can reach millions of dollars, so recipients often have questions about the tax implications of such an award. The IRS code differentiates between compensatory and punitive damages. While compensatory damages seek to restore the family financially, punitive damages are a punishment to the defendant for negligence or outrageous behavior resulting in the death of another. Punitive damages are not awarded in every case, and the laws regulating them vary by state. If you are filing for punitive damages in a wrongful death suit, consult your attorney about the laws of your state and the tax implications involved.
IRS Determination of Taxability
The IRS looks at the “economic substance” of a claim to determine whether or not proceeds from a lawsuit are taxable. The agency can challenge how the settlement dollars are categorized, punitive versus compensatory, if it doubts the accuracy of the reporting. Remember that the IRS can change these rules at any time, so you should consult a wrongful death lawyer, like a wrongful death lawyer in Woodland Hills, CA, to be sure you’re getting the most up to date advice.
No amount of money can ever bring back someone you love, but if the death was the result of another person’s negligence or improper actions, a wrongful death suit might help you put your life back together. Talk with an attorney who knows the laws and procedures in your jurisdiction to learn more about your rights. The lawyer can help you understand the federal and state tax implications of any award you may receive.
Thanks to the law offices of Barry P. Goldberg for their insight into whether or not wrongful death damages are taxable.