Is a Wrongful Death Settlement Considered Income?

What are the types of damages in a wrongful death settlement?

Wrongful death claims can include two types of damages, like other personal injury lawsuits. The first is called compensatory damages, and the second is called punitive damages. 

What are compensatory damages?

Compensatory damages consist of economic and non-economic damages. They are awarded to compensate the plaintiff for injuries and losses incurred. 

Economic damages include:

• Lost Wages
• Lost Future Wages
• Funeral Expenses
• Medical Bills

Non-economic damages include:

• Loss of Consortium
• Pain and Suffering
• Loss of Enjoyment
• Loss of Opportunity
• Emotional Distress

What are punitive damages?

Punitive damages, or exemplary damages, are special damages awarded in certain cases to punish the defendant’s behavior and to set an example to deter others. Punitive damages can be considered when the defendant’s conduct includes one or more of the following:

• Intentional Harm
• Conscious Disregard 
• Willful or Wanton Behavior
• Fraudulent Behavior

Are wrongful death settlements taxable?

In most cases, according to the IRS, compensatory damages are not considered income, while punitive damages are considered income. However, you need to be aware of exceptions as that could change whether the settlement you receive is considered income. 

When are compensatory damages considered taxable?

Generally, any amount received for compensatory damages is not considered part of your gross income. Therefore they are not taxable under IRC § 104(a)(2). The exception is when any amount is claimed as an itemized deduction for a previous or current tax year. 

For example, suppose you itemize your deductions on your tax return to deduct medical expenses and other allowable deductions related to your settlement. In that case, you may be required to pay taxes on those amounts. 

Lost wages and lost future wages may also be taxable in certain situations. However, this does not always apply in wrongful death settlements. 

When are punitive damages taxable in wrongful death cases?

Punitive damages are considered taxable in the majority of wrongful death cases. However, case law has varied based on the jurisdiction where survivors have taken the matter to court. For example, in Burford v. United States, the court found in favor of the survivors and excluded wrongful death compensation from being taxed. 

Yet, in O’Gilvie v. United States, the U.S. Supreme Court ruled punitive damages are taxable income. In Benavides v. United States, the Fifth Circuit Court of Appeals concluded that punitive damages are not excluded as gross income when the state laws also allow for compensatory damages, even if other state laws restrict wrongful death claims to punitive damages only. 

When are punitive damages considered nontaxable?

According to IRC § 104(c), punitive damages are nontaxable and not treated as income in a wrongful death action when the statutes of the state where the case was litigated only allow punitive damages to be awarded in a wrongful death claim. When this is the case, the settlement for any amount received after 1996 is nontaxable. 

What part of a wrongful death settlement remains tax-free income?

To review, according to IRS Rule 26 CFR § 1.104-1, in general, most compensatory damages are tax-free and usually include compensation for the following:

• Injuries and Illnesses 
• Medical Expenses
• Lost Wages
• Emotional Distress
• Funeral Expenses

As previously mentioned, if you made itemized deductions, then you are required to report the total amount you received before the deductions were made as income. For example, let’s say you itemized the medical expenses your loved one incurred prior to their death. Then, you would owe taxes on the total amount of medical expenses you were awarded. 

How can I minimize the amount of income I have to report in a wrongful death settlement?

The most important thing you can do is to ensure that the money awarded in your settlement is itemized for each specific type of compensation received, such as:

• Lost Wages
• Pain and Suffering
• Medical Expenses
• Emotional Distress
• Funeral Expenses
• Punitive Damages

Each line item should have a dollar amount listed next to it. This way, you can use this to limit the amount of income you need to report to just those items considered taxable. 

Next, you will want to open separate bank accounts for your settlement. You need to keep this money separate from your other sources of income, retirement funds, savings, and investments. When you mix your settlement money with your other money, then it could become taxable income, even if the money was previously not considered part of your gross income.

Another viable option when wrongful death lawyers are negotiating a settlement is to ask for a structured settlement. A structured settlement is where you receive a specific amount of the total settlement each year until it is paid in full.

When you have a structured settlement, you only have to claim income on the amounts received in that year from the settlement that is considered taxable. 

How can a wrongful death attorney help me with my wrongful death case?

You could be entitled to receive several different types of compensation for the loss of your loved one. However, you may not be fully aware of these, even though the insurance companies are. Sadly, they will not inform you of them either. 

As such, when you do not have legal representation, insurance companies can take advantage of you when you are the most vulnerable and still grieving the loss of your loved one. Unfortunately, this is just the nature of how insurance companies operate when they are concerned about having to pay out a huge settlement. 

It is better to get help from a wrongful death attorney at Bachus & Schanker. We offer a free case evaluation and consultation. We will explain to you the different types of compensation you could receive and answer all your questions and concerns. 

We will also deal directly with the insurance company and their lawyers on your behalf. We want you to focus on grieving your loss and having the time you need to heal without outside distractions. 

We fully understand no amount of money can make up for your loss. However, we will ensure you receive the maximum amount of compensation you are entitled to receive, so you can have a secure future. 

Sources:

26 CFR § 1.104-1. (2012).

Benavides v. United States, 497 F.3d 526 (5th Cir. 2007)

Burford v. United States, 642 F. Supp. 635 (N.D. Ala. 1986).

IRC § 104(a)(2). (2022).

IRC § 104(c). (2022).

Lawsuits, Awards, and Settlements Audit Techniques Guide. (2011).

O’Gilvie v. United States, 519 U.S. 79 (1996).