It is hard enough to handle the anguish and sorrow of losing a loved one. Then, there is the added stress of reaching a fair settlement. On top of that, when you find out that wrongful death settlements are taxable, it becomes a matter of extreme concern. Let us guide you to help you understand everything about wrongful death settlements and taxes.
Tax Treatment of Wrongful Death Settlements
Understanding the Internal Revenue Service (IRS) guidelines on taxation is crucial. The nature of the compensation provided determines the taxability of wrongful death settlements, which means not every compensation is taxable. Compensatory damages for physical injuries or sickness are non-taxable, but punitive damages or interest may be taxed, among others.
Punitive damages punish the wrongdoer for their negligent or intentional actions. They are intended to deter similar actions in the future and are not associated with specific financial or emotional losses. They are based on the severity of the wrongdoer’s conduct.
Which Aspects of Wrongful Death Settlements Can Not Be Taxed
Compensatory payments made to the victim’s family for their loss are non-taxable components. These are payments typically covering physical injuries or sickness and related distress and include pre-death medical expenses, pain, and suffering.
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Compensation for Physical Injuries or Sickness
Finances awarded for physical injuries or sickness resulting in wrongful death are non-taxable, as they are considered direct compensation for the loss instead of income.
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Medical Expenses
Compensation covering medical expenses incurred due to the injury or sickness before death is exempt from taxation since it is direct compensation.
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Emotional Distress
Amounts awarded for emotional distress directly related to physical injuries or sickness are not taxable, considering the deep connection between physical harm and emotional suffering.
Which Components of Wrongful Death Settlements Can Be Taxed
Some components of wrongful death settlements may be subject to taxes, including interest accrued on the settlement prior to distribution and punitive damages.
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Punitive Damages
This component is taxable, as punitive damages are designed to punish the wrongdoer instead of compensating the victim’s family, which makes them additional income. It is necessary to differentiate between compensatory and punitive damages when evaluating the tax implications of the settlement.
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Interest on Settlements
Interest becomes taxable if it is accrued in the settlement before it’s paid, as it is seen as income generated from the settlement amount. For instance, if your settlement amount is $200,000 and accrues an interest of $20,000 before it is paid, the $20,000 interest will be taxable.
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Specific Amounts of Emotional Distress Compensation
Emotional distress compensation related to physical injuries is exempt from tax. However, if it is not directly associated with physical injuries, it may be taxable. For more information, talk to our Anaheim wrongful death lawyer.
Exceptions in the Taxation of Wrongful Death Settlements
There are special considerations that can influence the taxation of wrongful death settlements, including:
- State Laws: Wrongful death settlements’ tax treatment varies state-wise. For example, California’s wrongful death laws do not tax compensatory damages for pain and suffering but do tax punitive damages.
- Estate Taxes: Portions of a wrongful death settlement may be taxable if they are included in the deceased’s estate. It primarily applies to larger settlements exceeding the estate tax exemption threshold.
- Settlement Allocation: Settlement allocated between taxable and non-taxable components also affects taxability. Keep non-taxable compensatory damages separate from taxable punitive damages to streamline tax reporting.
- Legal Expenses: These may be deductible and can apply to both taxable and non-taxable aspects, based on the situation.
Call A1 Accident Lawyer
While we have tried to keep the blog post simple for quick understanding, the tax implications of wrongful death settlements are complex. You need careful consideration and professional advice, and a specialist personal injury attorney in Anaheim can help. Every settlement is unique, and understanding the complications between taxable and non-taxable components is crucial. At A1 Accident Lawyer, we understand the legal and tax complexities of wrongful death settlements. If you have questions or require legal help, call us today.
Also Read: How Long Does It Take to Settle a Pedestrian Accident Claim?