The families of victims that lose their lives in an accident can get financial compensation through a wrongful death lawsuit. If they win, the family gets the money. But will the government get a share? Do you have to pay taxes on wrongful death settlements?
This is a complicated answer because the IRS has different rules depending on the damages you’ve received. However, for most damages, the federal government does not tax the money you receive. Here’s more information about taxes and settlements from Morelli Law.
Are Wrongful Death Damages Considered Income?
The IRS does not consider economic and non-economic damages income most of the time. However, there are exceptions depending on how you do your deductions. If you deduct expenses related to your loved one, you could owe taxes on that portion of the settlement. A wrongful death lawyer and a tax accountant can guide you on these cases.
If you receive punitive damages, the IRS considers this income, and it is almost always taxable. The one exception is in states where only punitive damages are allowed for wrongful death claims.
The tax rate for these is the same as your other income, so it gets added on top. This may push you up into a higher tax bracket, depending on how much you made.
What About State Taxes?
Most states follow the same guidelines for taxing settlements as the federal government, but you should verify this with your state’s income tax law.
A quick talk with a lawyer or CPA can clear up whether you need to set aside extra money for state tax payments. If your state doesn’t collect income taxes, it’s unlikely you’ll have to pay anything to the state.
What Are the Potential Damages in a Wrongful Death Settlement?
A wrongful death settlement is just like a personal injury settlement. It’s the same damages a survivor would have received if they could file on their own. These are economic, non-economic, and punitive damages.
Also, survivors may claim non-economic damages for their own pain and suffering, depending on their state.
Economic Damages in Wrongful Death Settlements
Economic damages are monetary losses related to the accident. These can be current losses and projected future financial losses because your loved one has passed away. Typical economic damages in wrongful death settlements include:
- Medical expenses for your loved one
- Reasonable funeral, cremation, or burial expenses
- Lost wages from the deceased
- Future income from the deceased if they had survived
Each state has different rules for what’s under economic damages, but the listed damages are allowed in almost all wrongful death claims. Our attorneys will pursue all potential economic damages in your claim that you may receive.
Non-Economic Damages in Wrongful Death Settlements
Non-economic damages are financial benefits given to compensate someone whose quality of life was damaged by an injury. In a wrongful death situation, sometimes the deceased suffered for a time before they died. This period may qualify for non-economic damages.
Some states also allow the families of victims to claim non-economic damages. A wrongful death attorney can tell you whether you’re eligible for these. Sometimes, non-economic damages are given directly to the victim’s estate, so they tax those damages according to how the estate is taxed.
Typical non-economic damages include things like:
- Pain and suffering
- Emotional trauma
- Mental anguish
- Loss of consortium or companionship
- Loss of services provided to their dependents
Punitive Damages in Wrongful Death Settlements
Punitive damages aren’t related to what happened to you. They’re a punishment given by a court to plaintiffs for gross negligence or deliberate wrongful action by defendants. Not every state allows punitive damages in wrongful death cases.
Your lawyer can tell you if your case may qualify for punitive damages and how much these might be worth, but they will have to take your case to court and argue for them to receive them.
How do I Start a Wrongful Death Claim?
Each state has different rules on who can start a wrongful death claim, so the best way to start is to speak with a licensed wrongful death attorney who practices in your state. Morelli Law practices in New York, New Jersey, Pennsylvania, Illinois, and Missouri. See our service area here.
Once the right person is named as the plaintiff for the case and accepted by the court, your case will proceed like other personal injury claims. The lawyer will gather evidence and present a claim to the defendant and their insurers. If they refuse to come up with a fair settlement, we will take them to court and fight for justice.
Are There Other Things that Can Affect My Settlement?
One thing that could reduce your settlement is if the deceased shared some of the blame for causing the accident. Depending on the state, this could reduce or eliminate your settlement. Most states will reduce the settlement by the percentage of fault the deceased contributed.
States will also have different rules for which damages are possible for a wrongful death claim. Going through all of them would take up too much space here. The best way to find out is to speak with a wrongful death lawyer in the state where the accident happened.
This is only an overview of the tax implications for wrongful death settlements, but tax law is always changing. You should consult with a qualified CPA familiar with settlements and tax law before deciding how to spend your settlement money.
If you are considering suing someone for wrongful death and you live in our practice area, contact Morelli Law for a free consultation about your case to learn about your legal options. We will help you through every step of the process.