When a family loses a loved one due to someone’s negligence or error, they may choose to file a wrongful death lawsuit. The filing of a lawsuit is well within a family’s legal rights to sue the person responsible for their loved one’s death. One thing to consider, however, after a settlement is the tax implications.
In general, a settlement or court-ordered judgement are tax-free. This means that you won’t owe the IRS a dime. There are, of course, exceptions as there are in many facets of tax law. It’s important to understand when you may owe the IRS taxes on your award to avoid troubles with the agency in the future.
There is a line drawn by the IRS between compensatory and Punitive Damages. Compensatory damages are those that are meant to compensate you for the loss. It is a way of helping return your life to the way it was, financially at least, before your loss. There are no taxes due to the IRS as the result of compensatory damages being awarded.
Punitive damages, on the other hand, are different, both in court and in the eyes of the IRS. While punitive damages are not awarded in all cases, they may be awarded in cases where the negligence was egregious or outrageous in nature. This most often occurs when the death was the result of a deliberate action.
Punitive damages are meant as a punishment. They are awarded so that the accused is less likely to take the same actions in the future. Because these are not meant to compensate you, the IRS wants its share. These damages don’t have to be called punitive to be taxed. They may also be called exemplary. No matter what they are called, come tax time, you must claim them as income.
Now the exceptions come in. Compensatory damages could be taxable if you took deductions for medical bills related to the accident. If you have filed the standard deduction in years past, you are clear. If you claimed medical expenses, you will have to report a portion of your compensatory award that is equal to the deduction you took.
In the case of punitive damages, you may be in the clear as well. If you live in a state that awards only punitive and not compensatory damages in a wrongful death case, the IRS won’t come knocking.
If you have been awarded a wrongful death settlement of any type, it’s important that you consult with a tax professional to understand what the implications may be. If you owe the IRS and don’t pay, you could face penalties and interest.
If a loved one has been killed in an accident in San Luis Obispo and someone else is found to have been at fault, reach out to our team of personal injury attorneys. We will review your case and advise you of your legal options.
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