One of the things you will want to consider when evaluating a potential settlement of a wrongful death claim is how much of that money will end up in your pocket. Are wrongful death settlements taxable? Also, are there things you can do to minimize or avoid having to pay taxes on the money damages you receive?
After losing a close loved one, it would make things worse if you had to hand over a large portion of your settlement to the government. There are things your wrongful death lawyer can do to protect some of the award from taxation in certain situations.
In General, Wrongful Death Settlements Are Not Taxable
Usually, wrongful death settlements are not considered income, which means that they are not taxable. The Internal Revenue Service (IRS) applies “26 CFR § 1.104-1 Compensation for injuries or sickness” to most of the money damages people receive in wrongful death cases because they are for personal injuries or sickness.
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Exceptions to the Rule That Wrongful Death Settlements Are Not Taxable
There are a few exceptions to the general rule that wrongful death settlements are not income and not taxable. Even in these situations, the other portions of the settlement are not taxable.
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Punitive Damages
Punitive damages are taxable. The purpose of punitive damages is to punish the defendant rather than to recover your losses. For this reason, it would be more advantageous to allocate more of the settlement toward compensatory damages, which can include mental pain and suffering, than toward punitive damages.
For example, if you settle a wrongful death claim for $10 million and the entire settlement amount is for compensatory damages, none of the settlement will be taxable.
On the other hand, if your $ million settlement is $1 million in compensatory damages and $9 million in punitive damages, you will have to pay taxes on the $9 million, which will slash the net value of your settlement.
Accrued Interest
Sometimes an award includes accrued interest. This situation often arises when a case gets appealed. There could be prejudgment and postjudgment interest. The accrued interest portion of the settlement is taxable.
Some Emotional Distress Awards
If part of the settlement was for emotional distress that was not the result of personal injury or illness, that portion of the settlement could be taxable.
Expenses Previously Deducted by the Decedent
Medical (and other) expenses the deceased person claimed as tax deductions could be taxable. The judge or insurance company must award these losses as part of the wrongful death settlement, though.
How to Minimize Taxation on Wrongful Death Settlements
One technique you might want to consider for minimizing tax consequences is to make sure that the settlement allocates how much of the wrongful death settlement is for compensatory damages and how much is for punitive damages. The IRS usually follows the judge’s allocation of these damages.
The Kinds of Wrongful Death Damages Allowed in Florida
The bulk of a wrongful death settlement typically includes compensation for the physical injury or sickness causing death. This can include the following:
- Pain and suffering
- Lost wages
- Future earning capacity
- Other compensatory damages, which are not considered gross income and are not taxable
Florida Statutes § 768.21 allows these kinds of damages in wrongful death cases:
- Every qualified survivor can receive compensation for the lost support from the date of the injury to the death of the decedent. This amount can bear interest.
- Many survivors can seek money damages for future loss of support and services from the date of the decedent’s death.
- When calculating the loss of support and services, the court will evaluate several factors. These could include the relationship between the decedent and the particular survivor, how much it would cost to replace the decedent’s services, and the life expectancies.
- In addition to the loss of past and future support and services, a surviving spouse can seek damages for mental pain and suffering from the accident date, and the loss of the protection and companionship of the decedent.
- In some situations, the deceased’s children can claim mental pain and suffering and the loss of parental companionship, guidance, and instruction.
- The survivor who paid the medical or funeral expenses of the deceased due to the injury or death can recover the amount they paid.
- Punitive damages can get awarded for reckless, intentional, or outrageous conduct.
Depending on your situation, you could pursue additional compensation.
Bogin, Munns & Munns is Ready to Fight for Justice for Your Loved One
When evaluating the possibility of settling your wrongful death claim, you could retain legal representation. The at-fault party’s insurer will have a lawyer.
Working with a wrongful death attorney on your side can protect your legal rights and help you seek the damages you deserve for your devastating loss. You can call Bogin, Munns & Munns today at (855) 686-6752 to get started.
We offer free consultations with no obligation and are prepared to support any Florida family in the areas we serve.
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