Tax Liabilities on Wrongful Death Compensation
For those who’ve received a settlement or a court judgment in their favor in a wrongful death compensation claim, there is no tax liability. The funds received are not taxable. The operative authority is spelled out in IRS Rule 1.104-1.
Generally, the mental loss suffered from someone’s actions and recovered through a judgment is not exempt from tax liability, which can be confirmed with an Irvine wrongful death lawyer. So mental suffering, for example, recovered as a financial judgment would have to be reported on one’s income tax. However, Under IRS Rule 1.104-1 a clarification was added when damages are recovered for a physical injury or physical sickness, then those financial gains are not taxable and to be excluded from taxable income. A wrongful death has been interpreted to qualify as a physical injury.
The above is important to understand. It can result in a huge difference in one’s income taxes due and reported for the year the lawsuit occurred. And, what is not taxable, shouldn’t be mistakenly included and lost from helping your family in a time of need.
Note that the exclusion is not generic and all-inclusive. An Irvine personal injury attorney will regularly advise there can be cases where some components of wrongful death cases are a mix, with some portion non-taxable and some portion taxable. For example, recoveries for prior year medical bills that were deducted in previous income tax filings can trigger taxability from a judgment years later. A judgment component specifically for emotional distress would be taxable if it had nothing to do with the physical injury or loss. Further, any punitive damages would also trigger taxability. In short, each component of a lawsuit judgment has to be broken down and examined for taxability separately.
In any case, where a judgment is awarded or a settlement executed, the attorney representing a recovery should make a point to review and advise the recipient client of each component of the award and how it is broken down. Ideally, an Irvine wrongful death attorney could also provide advice on taxability as well, but not everyone is a tax expert per se, even though it is a section of the law.
Give Brockmeier Law Group a call at 310-425-3431.