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Is A Wrongful Death Settlement Taxable?

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When one party’s negligence leads to a death, the deceased person’s surviving family members may be entitled to compensation in the form of “damages” through a wrongful death settlement. In many cases, these settlements amount to substantial sums of money, ranging from $500,000 to around $1 million or more. When receiving this amount of money, family members may wonder, Is a wrongful death settlement taxable? In other words, does the Internal Revenue Service (IRS) require individuals to claim death settlements as income on their tax returns? The team of attorneys at Steelman Gaunt Crowley may be able to help bereaved family members understand their tax obligations when receiving a wrongful death settlement. The law firm provides assistance to people who have lost family members due to someone else’s negligence, and helps the bereaved seek justice for the wrongful deaths of their loved ones. Call (573) 341-8336 to schedule a case review and discuss your situation. 

Is a Wrongful Death Settlement Taxable by the IRS?

According to the United States Internal Revenue Code §1.104-1, the settlement amounts family members receive in wrongful death cases are typically nontaxable. Wrongful death settlements are not usually subject to taxation because the Internal Revenue Service (IRS) considers such settlements under the same rubric as claims resulting from injuries and illnesses. 

Certain circumstances, however, may complicate the taxation question for individuals receiving payments as settlement for these types of claims. Some portion of the settlement may be taxed if any of the following is true:

  • The portion of the settlement for medical bills was deducted from the income in previous years
  • The portion of the settlement for emotional distress is not related to the distress experienced as a direct result of an injury or illness
  • The portion of the settlement is classified as punitive damages

Understanding which portions of your wrongful death settlement are taxable and which ones are not is essential to avoid potentially severe tax penalties. Making such a distinction on your own can be complicated, which is why you might want to consider seeking legal counsel. The team of attorneys at Steelman Gaunt Crowley may be able to review each portion of your settlement and explain how the IRS typically classifies payments for similar damages.

Types of Awards in Wrongful Death Settlements

Wrongful death settlements usually consist of two types of awards: compensatory and punitive damages. Compensatory damages, as the name suggests, are intended to compensate the surviving family members for their actual damages and losses associated with the death of a loved one. Punitive damages are fairly rare in wrongful death cases and are awarded to punish a defendant for particularly horrific actions. According to § 510.261 of the Revised Statutes of Missouri, punitive damages are awarded when there is evidence to prove that the defendant intentionally inflicted harm on the plaintiff without just cause, or acted with a deliberate disregard for the safety of others. Punitive awards also act as a deterrent to discourage the defendant and others from acting the same way in the future. 

While compensatory damages are typically not subject to taxation, the same cannot be said about punitive damages as these awards are not intended to compensate the surviving family members for their losses. However, there may be an exception to the general taxation rule for punitive damages in Missouri for wrongful death cases in which only punitive damages (without compensatory damages) are available under state law. 

The Rules for Filing a Wrongful Death Lawsuit

Taxation is not the only consideration when seeking legal action after the death of a loved one. Each state also has specific rules regarding who is allowed to file wrongful death lawsuits and how long eligible family members have to sue the defendant. The rules for who has the right to file a wrongful death lawsuit in Missouri are spelled out in the Missouri Revised Statutes § 537.080. Under the law, priority of legal standing to bring a wrongful death lawsuit belongs to the deceased person’s surviving spouse and children, followed by the decedent’s parents and siblings. If none of the aforementioned family members are alive, a “plaintiff ad litem” may be appointed by the court to bring a wrongful death lawsuit. The statute of limitations for such lawsuits in the state of Missouri is three years from the date of the death. 

Things To Consider When Filing Taxes

The answer to the question Is a wrongful death settlement taxable? would not be complete without a discussion of the special considerations that may apply when filing taxes after a wrongful death case is settled. First and foremost, the recipient(s) must identify how the payment was processed by reviewing court documents related to the settlement. For taxation purposes, it is vital that winning plaintiffs keep all documents regarding the settlement payments organized. 

After receiving compensation, review court documents to identify the following information: 

  • Which portion of the settlement is for compensatory damages and which portion is for punitive damages, if any? 
  • Has the payment been placed as income or wages, either in whole or in part?
  • Are there settlement checks or scheduled payments? 
  • How much did you pay in legal fees? 

Often, surviving family members of the deceased file two separate claims against the defendant, one for injury-related losses and the other one for non-injury-related losses. If both claims are settled, court documents will usually indicate the amounts for each claim. In the absence of proper documentation about the settlement, the IRS may challenge its tax-exempt status, either in part or in whole. 

Protect Your Right To File a Wrongful Death Lawsuit

The death of a loved one can take a lot of time to cope with, while seeking financial compensation after someone in your family passes away can be both time-consuming and tedious. Working with an experienced attorney can take much of the guesswork and legwork out of the process, allowing bereaved individuals to take the time they need to grieve and come to terms with an unexpected tragedy. 

Contact an Experienced Wrongful Death Lawyer

There may be many questions on your mind after a loved one dies, from, Am I entitled to compensation? to How much is my case worth? to Is a wrongful death settlement taxable? Everyone’s situation is unique, so it may be beneficial to seek individual attention from an attorney with experience in wrongful death cases. The attorneys at Steelman Gaunt Crowley help clients throughout Missouri pursue wrongful death lawsuits and are committed to making the entire process as understandable and accessible as possible. Reach out to the firm today by calling (573) 341-8336 and scheduling a free case evaluation to review your wrongful death claim.