Are Wrongful Death Settlements Taxable?

The unexpected and tragic loss of a loved one is a stressful time full of sorrow for the surviving family. There are many unknowns about the future that can leave people uncertain of what to do next, or even where to begin. 

Elite Litigation Group is here to help you through this difficult time and provide legal advice, guidance, and the assistance you need. You can focus on grieving your loss and not worry about your future, including answering the questions, “Are wrongful death settlements taxable?” and “What qualifies as a wrongful death lawsuit?” 

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Are Wrongful Death Settlements Taxable Under Federal Law?

Usually, wrongful death settlements are not taxable under federal law because they are not considered taxable income by the IRS. However, certain parts of your settlement could be taxable. 

What Parts Of A Wrongful Death Settlement Might Be Taxed?

The damages for wrongful death settlements that might be considered taxable include:

• Lost wages: If your settlement includes compensation for any future lost wages your loved one would have earned, they may be taxable, as their income would have been taxable had they survived and continued working.
• Non-economic damages: Compensation for non-economic damages might be taxable if they are not tied to a specific injury or related illness. 
• Interest income: Any interest earned on the settlement can be considered taxable income. 
• Medical expenses you deducted from your tax return: If you deducted medical expenses related to your loved one’s case from your tax return, you usually have to pay taxes on any medical expense compensation you receive later. 
• Punitive damages: If you are awarded punitive damages as part of your wrongful death settlement, they are taxable income since they are considered a punishment to the defendant for their egregious behavior or actions. 

Is Emotional Distress Compensation Taxable?

According to the IRS, emotional distress compensation can be taxable when it is not directly related to a physical injury or physical illness. If the emotional distress compensation is related to injury or illness, then it is not considered taxable income.  

Do You Have To Pay Taxes On A Wrongful Death Settlement In Your State?

Most states tend to follow federal guidelines when it comes to the taxability of wrongful death lawsuit settlements. However, the specifics regarding what is and is not considered taxable income vary from one state to the next. 

For example, most wrongful death settlements in Colorado are not taxable, so you do not have to pay state taxes. However, there are a few exceptions, similar to those at the federal level. 

How Are Punitive Damages Taxed Differently From Compensatory Damages?

Compensatory damages include both economic and non-economic damages. Economic damages are the actual financial losses you experienced, such as medical expenses, funeral expenses, and lost wages. Non-economic damages include emotional distress, pain, and suffering. As already mentioned, most compensatory damages are not considered taxable, with a few exceptions.

Wrongful death lawsuit settlements’ taxable income always includes punitive damages. The IRS views them as a financial windfall, not compensation for the loss of your loved one. It is important to remember that punitive damages are awarded in cases where the defendant’s behavior or actions were considered egregious, reckless, or malicious. Their purpose is to punish the defendant, and to deter others from engaging in similar behaviors. 

Additionally, you are usually not allowed to deduct attorney fees that are associated with punitive damages from your tax return. So, you must claim the total amount awarded, even if a portion of the amount went to pay your attorney. 

Can A Wrongful Death Settlement Impact Estate Taxes?

Wrongful death settlements are usually not included as part of the decedent’s estate. So they would have no impact on estate taxes. However, there are some exceptions:

• The settlement was made payable to the decedent’s estate: If the wrongful death settlement was paid directly to the estate, it can increase the value of the estate and exceed federal and state exemption thresholds, resulting in estate taxes.
• State-specific laws: There can be state-specific laws in the state where you live and receive the settlement. For example, in Colorado, wrongful death settlements usually have no impact on estate taxes, but there are exceptions. So, it is best to consult with a wrongful death attorney for guidance. 

How Does Elite Litigation Group Help Protect Your Settlement From Unnecessary Taxation?

Elite Litigation Group can help protect your settlement from unnecessary taxation in several ways, including:

• Strategic settlement structuring: We will structure your settlement to minimize tax liability by itemizing each part of the settlement and distinguishing between non-taxable and taxable compensation. 
• Minimizing tax liability: We use different tools and wrongful death settlement payout options to reduce and potentially eliminate tax liability, such as creating a plaintiff recovery trust or using a structured settlement.
• Access to tax professionals: We provide you with access to trusted tax experts, or we can work with your accountant to explore all potential options for reducing your tax liability. 

Why Should You Choose Elite Litigation Group For A Wrongful Death Claim?

Some of the reasons you should choose Elite Litigation Group for your wrongful death claim are:

• Specialized expertise with a focus on catastrophic injury and wrongful death cases
• You are assigned a dedicated legal team
• Access to our Victim Advocates to support you through this difficult time
• We provide comprehensive support to ensure maximum compensation 
• Expert wrongful death litigation in Colorado, if a settlement cannot be reached
• We focus on your personal and legal needs
• Kyle Bachus has firsthand experience with the emotional toll wrongful death has on you and your family
• We provide guidance and compassion beyond representing your legal interests
• No upfront costs and a free case evaluation and consultation

Let us help you start rebuilding your life after the unexpected loss of a loved one, and help you receive the compensation you deserve. 

Contact Us Now For Your Free Consultation.