Most clients have concerns about tax consequences after they have received a settlement or judgment. One of the first questions is whether or not they have to pay taxes on the money they have been awarded. There are many factors that determine the tax consequences, such as, which state you live in and the type of damages you have been awarded. So, if you are wondering, are wrongful death damages taxable, the answer is: it depends.
What exactly are wrongful death damages?
The laws governing wrongful death claims are different for each state, as are the limitations on damages that can be recovered for such claims. The laws in Missouri and Arkansas are pretty similar with regard to these claims. Wrongful death is generally defined as the death of a person resulting from the negligent or intentional conduct of another. Technically, a wrongful death claim is a personal injury claim where the victim is deceased and can no longer seek damages. Because of those circumstances, the survivors of the deceased victim are allowed, by law, to seek damages on behalf of the deceased. In some cases, the survivors can seek compensation for their own damages, as well.
IRS regulations regarding lawsuit settlements
The IRS has determined that lawsuit proceeds, whether by settlement or jury verdict, are non-taxable if they are compensatory in nature. This means, an award for physical illness or injury or compensation for pain and suffering would be non-taxable. This also means that a settlement of a wrongful death claim, that is solely compensatory, is not required to be reported as income on person tax returns. However, any additional award, for instance punitive damages or lost wages, is considered income and would be subject to income tax.
What types of wrongful death damages are allowed?
In Missouri, wrongful death damages can include funeral and burial expenses, medical bills related to the deceased person’s final injury or illness, the value of any wages and benefits the deceased would have earned if not for the death, pain and suffering of the deceased just prior to death. There are also claims that can be made for damages incurred by the survivors, as well.
The law in Arkansas actually separates the claims into the estate claim and the family claim. The claims of the estate seek compensation for losses the deceased suffered as a result of his or her wrongful death. Whereas, the family claim is for the surviving family of the deceased, seeking compensation for losses the relatives suffered as a result of losing a family member. The family claims are usually for loss of financial support from the deceased, loss of household services, and loss of care, comfort and guidance.
If you have questions regarding damage awards and taxes, or any other wrongful death concerns, call the Cottrell Law Office at (888) 433-4861.
He is licensed to practice law in the United States District Court for the District of Kansas, eastern Arkansas, western Arkansas, and western Missouri. He was Deputy Prosecuting Attorney in Crawford County, Kansas from 1987-1989.
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