One question we get often is if wrongful death settlements are taxable. The general rule of thumb is that wrongful death settlements are not taxable.
According to the Internal Revenue Service (IRS) under IRS Rule 1.104-1, the settlement amount received from a wrongful death settlement is not taxable. This is because the IRS classifies it as part of a claim stemming from personal injuries or physical illness.
The Internal Revenue Service considers any portion of a settlement or award that is “compensatory” as non-taxable. These compensatory damages are intended to compensate a party for a loss that he or she has already sustained, so cannot be considered “income” for tax purposes.
Unfortunately for plaintiffs, the analysis does not stop there.
Many survival actions result in significant punitive damages, intended to punish a party for their conduct and discourage others from engaging in the same or similar conduct.
When these actions are brought against a large corporate defendant, punitive damages are often substantial, in order to make a noticeable impact on the defendant’s financial situation.
In determining the portion of a settlement or award that is taxable, the IRS will analyze the nature of the claimed damages. Furthermore, the IRS has the legal authority to challenge the way a settlement is structured in cases where the ratio of punitive to compensatory damages does not reflect the “economic substance” of the settlement.
Exceptions may Apply to the Taxation of Wrongful Death Settlements
As is often the case in legal matters, there are certain cases where an exception will apply and punitive damages will not be considered taxable income. There are many considerations depending on your state. Our team of wrongful death lawyers can help you navigate these issues.
The IRS does not tax your wrongful death lawsuit settlement. However, under specific circumstances, other portions of your settlement may be taxable. For instance, the portion of your settlement you received for medical bills and expenses deducted from your income in previous years could be taxed.
A skilled attorney can help you navigate the tax implications of your wrongful death settlement.
But what about California state taxes?
Do you have to pay California state taxes after a wrongful death settlement?
California law often entitles individuals who have lost a loved one because of preventable accidents or the intentional acts of another person to recover significant financial compensation.
There are two separate legal actions available to surviving family members, allowing survivors to pursue various and mutually exclusive damages:
Survival Action Tax Liability
Described in California Code of Civil Procedure §377.30, survival actions are brought by the personal representatives of a decedent’s estate and allow them to pursue any personal injury claims that the decedent could have pursued had he or she lived.
The damages available in these actions include punitive damages, medical expenses, lost income, and property damage. Any damages recovered become part of the deceased’s estate and are distributed to family according to California probate laws.
Wrongful Death Action Tax Liability
These actions are brought under California Code of Civil Procedure §377.60 and allow surviving family members such as spouses, siblings, parents, and children to bring a lawsuit in order to recover for their own losses.
Examples of damages that are often successfully sought in California wrongful death lawsuits include funeral expenses, loss of household services, loss of financial support, and loss of companionship from a spouse or family members.
The amount of compensation that family members often recover in these kinds of legal actions can easily rise into the millions of dollars. For this reason, many people who are considering a wrongful death or survival action wonder if they can avoid incurring a significant tax liability when they receive a settlement or award.
In California, Your Wrongful Death Award may be Taxable
Under California law, a portion of the award from a survival action may be taxable, as state law allows for punitive damages in wrongful death lawsuits.
On the other hand, as wrongful death damages are limited to compensatory damages, any settlement amount or award you receive may be treated as nontaxable. Of course, for specific information regarding your case, you should speak with an attorney familiar with representing clients in your position.
In response to whether a wrongful death settlement is considered income: Typically, it is not viewed as income. Consequently, in the majority of situations, such settlements are not subject to taxation, as per the Internal Revenue Service (IRS).
Need More Advice? Talk To Us
If you have lost a loved one in a preventable accident or because of someone’s wrongful conduct, you should call our California wrongful death lawyers today.
Our skilled lawyers are dedicated to protecting the legal rights of survivors and understand how important it is for families to obtain closure through a successful legal action.
To schedule a free consultation with one of our lawyers, call our office today at 866-218-3776.
This post was written by Andy Gillin and updated on 3/21/23