June 7, 2017
If you have lost a loved one and you are considering a wrongful death claim, it is common to wonder if you will get hit with a massive bill from the IRS. Most wrongful death settlements are in the hundreds of thousands or millions of dollars range, so if the IRS wanted a chunk, it would be a hefty one. I am not a CPA, and I recommend you also run this by your accountant.
Compensatory Damages in Wrongful Death Settlements
Let me set your mind at ease; wrongful death settlements are not taxable by the IRS. Generally speaking, the awards or settlements that compensate you for a loss that has already been sustained are not viewed as income by the IRS, so they are not taxable. The IRS stipulates that any lawsuit settlement, awarded by the court for physical illness or injury, is non-taxable. Since the damages are the result of the court finding a third party responsible for the physical illness or injury that resulted in death, wrongful death settlements are considered non-taxable.
Punitive Damages in Wrongful Death Settlements
Keep in mind that punitive damages are an entirely different animal as far as the IRS is concerned. When the court awards a plaintiff punitive damages, they are punishing the defendant (the legally responsible party) for outrageous or egregious behavior and hoping to discourage others from repeating that conduct. Typically the IRS will consider the nature of the claim when determining what portion they will tax. It is possible they will not tax any part of the settlement, even the punitive damages part in certain cases. Some states only allow punitive damages in a wrongful death claim, in those states, the IRS considers the settlement exempt from taxable income.
Alaska law allows for both compensatory and punitive damages so if your settlement includes both, the IRS may tax a portion of it, but they will not tax the part considered compensatory. Unfortunately, the IRS can and does change its interpretation of the law at any time, so it is always wise to connect with both your CPA and your wrongful death suit attorney about your specific situation.