Wrongful death damages and potential tax implications

On Behalf of | Oct 12, 2023 | Wrongful Death

Grieving a lost loved one is never easy, especially when their life was suddenly taken due to the negligence of another person. No words, actions or money can make the situation better because nothing can bring back their loved one wrongfully taken from them.

While it is an emotional and difficult time to navigate, it is also a time when loved ones need to assess their legal options and whether a wrongful death action is appropriate.

Filing a wrongful death claim

When seeking to hold a negligent party responsible for the death of a loved one, a wrongful death action is the route to take. Often, when a settlement is reached or compensation is court-ordered, they include compensatory damages to address the financial losses suffered. In some cases, a judge might order punitive damages. These are used to punish the individual for their negligence that was particularly outrageous or egregious.

When damages are awarded, the IRS typically will not take a portion of the award in taxes. However, it is important to note that there could be tax implications om wrongful death damages.

Potential tax implications on damages

With regards to compensatory damages, the IRS will not tax them. Wrongful death suits fall under the tax umbrella of personal injury litigation. Thus, they are not subjected to taxation

On the contrary, punitive damages are different in the eyes of the IRS. When punitive or exemplary damages are awarded, they will be taxed.

It should be noted that there are some exceptions. Compensatory damages could be taxable if the individual took deduction from their income for medical bills related to the incident that resulted in the death of a loved one. If the standard deduction was claimed, then there is nothing to worry about. Additionally, punitive damages may not face taxation. In states where only punitive damages are awarded in a wrongful death action, taxes are not paid on them.

A wrongful death action is complex and difficult for many reasons. As such, it is important to gain a full legal perspective of the matter. This can help ensure you rights are protected as you move forward with a legal action.

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