Are Wrongful Death Settlements Taxable?

Wrongful death settlements in Virginia can vary significantly, ranging from modest sums to substantial amounts that provide vital compensation for surviving family members. These settlements may include economic damages such as medical bills and lost wages, as well as non-economic damages like a spouse’s loss of companionship or a child’s loss of guidance. The total settlement amount depends on the unique circumstances of each case. Once a settlement is accepted, it’s crucial to understand the potential tax implications.

Are wrongful death settlements taxable? Generally, they are not. However, there are specific circumstances where portions of a settlement might be subject to taxation. Our Virginia wrongful death attorneys can provide clarity.

Wrongful Death Settlements and Judgments Are Usually Not Taxable

A wrongful death settlement occurs when the plaintiff agrees to accept a monetary amount offered by the defendant to resolve the case outside of court. While this amount may sometimes be less than what a jury verdict might award, settlements often save time, reduce legal expenses, and alleviate the stress of prolonged litigation. Conversely, a judgment is the result of a court decision, where damages are awarded to the plaintiff based on the evidence presented.

Under federal law, both settlements and judgments are generally taxable unless an exception applies. One key exception, as outlined in 26 USC 104, applies to payments made for personal physical injuries or physical sickness. Wrongful death settlements typically fall under this exception, meaning they are not subject to federal income tax.

This exemption ensures that the financial compensation survivors receive for their loss is not treated as taxable income. As a result, wrongful death settlements, including damages for physical injuries or illnesses related to the case, are usually non-taxable.

When Portions of a Wrongful Death Settlement May Be Taxable

While most wrongful death settlements are tax-free, there are specific situations where certain components of the settlement might be subject to taxation. These exceptions include:

• Punitive Damages: These are awarded in rare cases involving particularly egregious conduct by the defendant. Punitive damages are intended to punish the wrongdoer rather than compensate the survivors and are taxable under federal law.
• Accrued Interest: If the settlement includes interest that accumulated during the legal process, that portion of the payment is considered taxable income.
• Previously Deducted Expenses: Any expenses, such as medical bills, that were previously claimed as tax deductions on a federal tax return may require the corresponding portion of the settlement to be reported as taxable income.
• Emotional Distress Compensation: In some cases, payments for emotional distress may be taxable if they are not directly tied to physical injuries or sickness. However, damages for emotional suffering linked to physical injuries are generally tax-free.

Given these exceptions, it’s important to carefully analyze the breakdown of any wrongful death settlement to determine if any taxable components are included.

How to Avoid Tax Issues with a Wrongful Death Settlement

To ensure that no portion of your settlement is unnecessarily subject to taxation, it is critical to consult with an experienced wrongful death lawyer. An attorney can help structure the settlement appropriately, ensuring compliance with tax laws and minimizing your liability.

Contact a Virginia Wrongful Death Lawyer

If you have questions about the taxability of a wrongful death settlement or need assistance navigating the legal and financial aspects of your case, reach out to a Virginia wrongful death attorney as soon as possible. Contact The Jackson Law Group today for personalized guidance and support.