Are Wrongful Death Awards Taxable?
The answer depends on the characterization of the award. California and the IRS tax all income received in a taxable year unless certain exceptions apply. Compensatory damages awarded in personal injury and wrongful death lawsuits fall under an exception. Therefore, any compensatory damages awarded to wrongful death claimaints will generally not be subject to income tax. The reason for this is that if the damage award is an attempt to make the claimant whole again, then the award should not be considered income, but rather, loss recovery.
There is, however, and exception to the exception. If the claimaints took deductions for medical costs paid on behalf of their loved one prior to their death, then the amount of the settlement or judgment equal to those deductions will be taxable.
Damages that are not compensatory, including emotional and punitive awards, will be subject to income tax. These amounts received must be reported as “other income” on line 21 of a 1040 tax return.
Before entering into a settlement agreement, the party or parties claiming damages must consider possible tax consequences. Compensatory damages are generally not subject to income tax, while non-economic damages are. Additionally, wrongful death claimants will be required to pay taxes on attorneys fees, even if those are paid directly from a wrongful death settlement award.
Lump sum or structured settlement?
Many times, settlements can be structured over a number of years or distributed in a single lump sum. A smart claimant will consider the tax implications of each before choosing which option they prefer.
- Lump sum: Compensatory awards are generally tax-free, but any interest earned on the award may not be. Claimants who want to ensure they don’t owe tax on their comepsnatory award may be more interested in a lump sum payment.
- Structured settlement or annuity: Claimants may still be able to avoid taxation of any interest that is earned on their award if they opt for a structured settlement, but doing so will be more costly, time-consuming, and restrictive. Structured settlements can help to to provide steady financially allocations for living, medical, and education expenses. Structured settlements can be distributed from a trust or other depository holding, and if set up correctly and distributed properly, any interest earned on that award may accrue tax-free.
Types of Damages Available
In California, family members, heirs, and partners of an individual who was the victim of a wrongful death may seek damages from the party whose negligent or reckless actions caused the death. These awards are generally divided into two categories: compensatory and non-economic.
Compensatory or out-of-pocket damages are those expenses that can be calculated and verified, and often include:
- Medical costs, funeral costs, lost financial support or the value of gifts and services the deceased provided to the claiming spouse, child, partner, or representative; plus interest from the date of death.
Compensatory damages are awarded to make a claimant whole, or back in the position they would have been in before the loss of their loved one.
Non-economic damages are awards for injuries that are less easily calculated. Emotional losses are a major source of non-economic damages, and often include compensation for:
- The loss of comfort, care, protection, sexual relations, companionship, training, guidance, affection, and moral support.
Punitive damages are another type of non-economic damage. They are designed to punish defendant or defendants for the wrongful acts leading to the loved one’s death. However, punitive awards are rarely permitted in California wrongful death lawsuits. California does permit juries to award punitive damages in certain egregious cases, such as those where a loved one is killed in a felony murder. For example, a wife may be awarded punitive damages if her husband is killed during the course of a robbery at a grocery store where he happens to be shopping. If the person who killed her husband is convicted of felony-murder for the crime, the wife is permitted to seek punitive compensation.
In many cases, wrongful death claimants and at-fault parties often settle matters before or during a trial. If, however, parties are unable to settle on their own, the court will award damages in the form of a judgment. Claimaints who recover compensation in a wrongful death settlement or judgment may be subject to income tax liability. Whether or not damages awarded in a wrongful death lawsuit depend on the characterization of the damages.
Additional Information to Consider
The portion of a wrongful death settlement or judgment that is taxable may affect the claimant’s tax bracket. The rate at which your income is taxed may increase if a wrongful death award is substantial. If, for example, prior to a taxable wrongful death settlement a claimant had income that placed them in the 15% tax bracket, a significant taxable award could push them up the ladder into the 25% tax bracket. Not only would their award be taxable, but it would be taxable at a greater rate.
The portation of the wrongful death settlement may also cause estate tax. If an award is significant, and pushes the decedent’s estate to a value exceeding $5.49 Million, the IRS and California may impose a tax. The decendent’s estate will include wrongful death awards for all of their losses.
The taxation of wrongful death awards is complicated. Tax laws change often and wrongful death damages can consist of both taxable and nontaxable compensation. Getting the assistance of an experienced personal injury attorney is an important first step in understanding potential ramifications of wrongful death settlement awards. Contact Injury Trial Lawyers, APC today for a free, no-obligation consultation to learn about the tax consequences of wrongful death settlement awards.