If wrongful death damages are recovered, is that money taxable?

Wrongful death lawsuits are filed by the estate or family of a person who died as a result of someone else’s actions or lack thereof. These suits seek to hold the person or entity financially responsible for the decedent’s death. In general, courts can award two types of damages, compensatory and punitive, though punitive damages are not available in every state. The Internal Revenue Service (IRS) does not tax compensatory damages; however, punitive damages are subject to taxation.

Internal Revenue Service Code on Wrongful Death Damages

The IRS code states that a court’s award for illness or injuries is not taxable, which includes compensatory damages from a wrongful death lawsuit because they are related to disease or injury resulting in death. You can think of compensatory damages as an attempt to make the family whole after the loss of their loved one, although money cannot bring back the person who was lost. Under this IRS definition, compensatory damages are not reported on the federal tax return.

Punitive damages, awards for emotional distress, and payment for lost wages are taxable under the IRS code. These awards are taxable income because they go beyond making the decedent’s family whole. Punitive damages, which are awarded by the court to punish a defendant for negligence or egregious behavior, are closely scrutinized by the IRS. You may also see them described as exemplary damages. Except under specific circumstances, punitive damages are fully taxable.

Some states further divide wrongful death claims into family claims and estate claims. Family claims are the losses suffered by the relatives as a result of the decedent’s absence. Estate claims are the harms and losses suffered by the decedent before death. If your state has this arrangement, you need the expertise of an attorney familiar with your state’s laws.

The Importance of Competent Counsel

The interplay between federal and state laws creates a complicated set of rules related to wrongful death lawsuits. If you are involved in one of these cases, you need counsel from an experienced and knowledgeable attorney in your area to understand your rights and the tax implications of any award you may receive. For the best results, look for a wrongful death attorney in Houston, TX who focuses primarily on wrongful death and personal injury cases. If the defendant is a corporation, you’ll likely be facing a team of high powered lawyers, so you need experience on your side. A reputable attorney should not ask for payment upfront as the attorney gets paid only if you receive a settlement or court’s judgment.

 

Thanks to John K. Zaid & Associates for their insight into personal injury claims and wrongful death damages.

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