Are Wrongful Death Settlements Taxable?
Justin Sheldon—April 16, 2021
After losing a loved one, compensation in the form of a wrongful death settlement might not heal your wounds, but it may help you move forward and rebuild your life. While taxes are likely far from your mind at such a time, it’s important to consider the implications a wrongful death settlement may have on your taxes.
There are general rules regarding taxable and non-taxable settlements, which we’ve outlined below. Still, when moving forward with a wrongful death settlement in Virginia, we always recommend contacting a law office like Breit Biniazan to help you understand the often confusing regulations and laws around wrongful death settlements and their tax implications. At Breit Biniazan, we navigate regulations, laws and tax implications so that our clients can focus on what matters most: taking care of themselves.
Types of Damages that are Awarded
There are two types of awards offered in wrongful death cases — punitive and compensatory — that are taxed differently.
Compensatory awards are paid by the plaintiff and are intended to, as the name suggests, compensate the victim for their losses. Because compensatory awards are designed to bring justice to the victims who were wronged, they are typically not taxed by the IRS.
Punitive awards, on the other hand, are designed to punish the liable party and ensure the damage isn’t done again, therefore protecting other parties. Unlike compensatory awards, punitive awards are not intended to provide for the victim’s losses, and therefore may be subject to taxation.
While punitive awards are usually taxable and compensatory awards are not, there are exceptions to these rules, which is why it’s important to recruit the help of a lawyer in wrongful death cases in Virginia.
Non-Taxable Portions of a Settlement
While each settlement is unique, there are different portions of the settlement that may be taxable or non-taxable according to the IRS. That’s why it’s important to request a detailed settlement agreement so that you can easily identify which aspects of the settlement may or may not be subject to taxation.
Parts of a wrongful death award that are always tax-free include:
- Compensation for physical illness or physical injury
- Compensation for medical expenses related to the illness or physical injury
- Compensation for emotional distress resulting from the injury or illness (although there are narrow variables in these cases, and if you are compensated for only emotional suffering without an injury or ailment, it may be taxable)
- Compensation for wages lost due to the injury or illness
Taxable Portions of a Settlement
While most compensation from a wrongful death settlement is not considered income by the IRS, and is therefore not taxable, there are exceptions. Parts of a settlement that may be subject to taxation include:
- Punitive damages: Again, because these settlements are intended to safeguard other victims, rather than compensate the victim for their losses, they are taxable.
- Deducted expenses: For example, if you deduct medical expenses on your tax returns, the deducted portion is taxable.
- Interest or appreciation: If you earn interest or appreciation for your settlement—like in an interest-bearing bank account—that additional income is taxable.
The Complexity of Wrongful Death Claims
In general, wrongful death settlements provide greater compensation for victims and are largely non-taxable. However, as you may be filing multiple claims against the defendant in addition to a wrongful death claim, those settlements will come with different awards and taxation obligations. That’s why it’s important to explicitly determine via a settlement agreement how much is being paid for each element of each claim. This ensures you do not pay taxes for non-taxable compensation or vice versa.
As you recover from the loss of a loved one, you will have enough to consider—understanding tax law shouldn’t be one of them. Our experienced lawyers will fight for you to receive the compensation you deserve, but we’re also dedicated to helping our clients long after their case is closed, including understanding the tax implications of their settlement. Our attorneys in Virginia Beach and Richmond have helped hundreds of clients navigate the complicated consequences of a wrongful death suit, and we can do the same for your case. Feel free to contact us if you have any questions.
After graduating, cum laude from the University of Richmond School of Law in 2011, Justin Sheldon began his legal career with a large national firm doing high-stakes business litigation. He soon moved on to a boutique firm specializing in auto products liability litigation throughout the United States.