According to IRS Rule 1.104-1, the amount of money you receive from a wrongful death settlement is not taxable.
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
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. 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 Actions – 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 estate and are distributed to family according to California probate laws.
Wrongful Death Actions – 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 actions include funeral expenses, loss of household services, loss of financial support, and loss of companionship.
The amount of compensation that family members often recover in these kinds of 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 these cases. On the other hand, as wrongful death damages are limited to compensatory damages, any settlement 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.
Contact GJEL Accident Attorneys Today
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.