Are wrongful death settlements taxable?
Will I have to report my settlement as income on my federal tax return?
It depends both on the details of your settlement and your tax history. Some parts of your wrongful death settlement may be taxable, and other parts are not.
In general, the IRS does not consider compensatory damages as taxable income. Compensatory damages are those damages a court awards to compensate a person for losses they suffered as a result of a wrongful act of another. These can include economic damages or noneconomic damages.
Economic damages include:
- Medical expenses;
- Funeral and burial expenses; and
- Loss of income and future financial support.
Non-economic damages offer compensation for:
- The decedent’s physical and mental pain and suffering from the moment of injury until death;
- Loss of companionship for a spouse; and
- Mental anguish of survivors.
What if I deducted some medical costs on a previous tax return?
Under the state’s wrongful death statute, you may recover damages for medical or funeral expenses you paid on behalf of your loved one. Since the IRS considers these compensatory damages, they are not usually taxable. However, if you deducted the cost of these medical expenses on a previous year’s tax returns, you will have to include the amount of those deductions in your taxable income.
If this is your situation, you will need to calculate the taxable amount of your settlement using IRS Publication 525. When filing your return, enter this amount as “Other Income” on line 21 of the federal tax Form 1040.
Are punitive damages taxable in a wrongful death settlement?
Punitive damages are not part of your compensatory damages and are generally taxable.
Courts award punitive damages in addition to other damages for the purpose of punishing the defendant and discouraging similar actions in the future. They are usually awarded only for intentional, reckless, or extremely negligent behavior that resulted in the death of the victim.
Is my settlement’s interest taxable?
In general, the IRS can tax the interest on any type of settlement. You should report this amount as “Interest Income” on line 8a of the federal tax Form 1040.
If you need help understanding your tax obligations after a settlement, contact the Montero Law Center.
If you have questions about your wrongful death settlement or are considering filing a claim, the lawyers at the Montero Law Center can help. We can investigate a new claim and handle it from start to settlement. If you already received a settlement, we can help you understand what it entails. Call us today at 954-767-6500 for your free, no-obligation consultation.