No amount of money can ever compensate for the heartbreaking loss of a loved one. But if another person’s careless actions caused that loss, your family may be entitled to a wrongful death settlement. As you deal with this difficult time and consider pursuing a claim, a question may arise: are wrongful death settlements taxable? The short answer in most cases is no, but there are some important details and exceptions to be aware of. Our Care Team at Wrongful Death Attorneys will advise you on how to deal with your wrongful death claim in Arizona and South Carolina.
What Is a Wrongful Death Settlement?
First, let’s define what we mean by a “wrongful death settlement.” When a person dies because of the legal fault of another person or entity (like a business or organization), the survivors may be able to bring a wrongful death lawsuit. This civil action seeks compensation for losses suffered due to the death, such as:
- Lost wages and benefits the deceased would have earned
- Funeral and burial expenses
- Loss of care, guidance, and companionship
- Pain and suffering of the survivors
- Medical bills that led to the deceased person’s final illness or injury
If the lawsuit is successful, the money recovered is called a wrongful death settlement or award. The settlement may come through a court verdict or an out-of-court agreement between the parties.
Tax and Wrongful Death Settlements
So, is a wrongful death settlement taxable?
The IRS does not consider wrongful death settlements to be taxable income. The tax code specifically states that damages received “on account of personal physical injuries or physical sickness” are not taxable, whether through a lawsuit judgment or settlement. This means if a wrongful death case involves the following, the settlement money is likely tax-free:
- Medical malpractice causing the person’s death
- A fatal car accident, work accident, or other unintentional injury
- Murder or other intentional fatal injury
The key is that the wrongful death must be from a physical injury or sickness. If the case centers on emotional distress or financial losses alone, without a physical injury, the settlement may be at least partially taxable.
Exceptions and Gray Areas
While the general rule is that wrongful death settlements are tax-exempt, there are some exceptions and tricky situations to watch out for:
- Interest: If the settlement includes interest (for example, pre- or post-judgment interest), that portion is taxable as interest income.
- Punitive damages: Most wrongful death settlements focus on compensatory damages, which reimburse the estate for losses. However, some also include punitive damages, which aim to punish wrongdoers and deter similar conduct. Punitive damages are usually taxable.
- Breach of contract: Rarely, a wrongful death case may involve a breach of contract claim. For instance, maybe the death happened because a safety equipment manufacturer failed to honor its contract. Damages for breach of contract are generally taxable.
- Emotional distress: As mentioned above, settlements for emotional distress alone, without a physical injury or sickness, may be taxable. However, if the emotional distress originated from a physical injury, it is likely tax-free. This is a complex area where tax treatment depends heavily on the details of the case.
State Laws on Taxing Settlements
It’s also important to consider state tax laws. While the IRS governs federal income tax, each state has its income tax system and rules. Most states follow the federal law that personal injury and wrongful death settlements are tax-free.
However, a few consider certain settlement amounts to be taxable income.
In Arizona and South Carolina, specifically, the state tax law around wrongful death settlements is in line with federal law—settlements should not be taxable as long as they originate from a physical injury. But every case is unique, so it’s wise to consult an accountant or tax attorney in your state.
Structuring Settlements to Minimize Taxes
If you expect a portion of your wrongful death settlement to be taxable, there may be strategies to minimize the tax impact.
An experienced attorney can help you structure the settlement most advantageously. Here are a few options to discuss:
- Specifying amounts for different types of damages in the settlement (compensatory vs. punitive, physical injury vs. interest, etc.)
- Structuring the settlement as a series of payments over time rather than a lump sum (to spread out taxes)
- Using a qualified settlement fund to hold the money before distribution
The right approach depends on the nature of your case and your financial goals. An attorney and tax professional can guide you. It is important to know that sometimes, dealing with insurance can be messy. They are out to reduce your compensation and even prevent it altogether. Therefore, it is wise to work with an experienced attorney to get the compensation you deserve.
Seeking Knowledgeable Advice
Taxation of legal settlements is a complex area where laws and interpretations shift frequently.
Having knowledgeable, compassionate legal and tax advisors on your side is so valuable if you find yourself grappling with a wrongful death case. An experienced wrongful death attorney can fight for your rights and make the process as smooth as possible.
Our team at Wrongful Death Lawyer is here to support you with information, resources, and connections as you consider your legal options. We know the idea of navigating a lawsuit may feel overwhelming amidst your grief. Let us be a source of clarity and comfort.
If you have suffered the ultimate loss due to someone else’s negligence or misconduct, you may be entitled to compensation through a wrongful death claim – and in most cases, that compensation is tax-free. While the tax rules have some nuances, don’t let tax concerns prevent you from exploring your rights.
Let Us Help You Today
Nothing can erase your loss, but a wrongful death settlement can ease financial burdens and provide a sense of justice. It’s one way to honor your loved one’s memory and begin to rebuild. We are here to help you understand your options and connect with trusted professionals.
Please don’t hesitate to reach out to our Care Team to learn more or get your questions answered.
We’re here for you every step of the way.