If your loved one has died as a result of someone else’s negligent or criminal actions you may have already begun the process of filing a lawsuit seeking compensation for your loss. Settlement awards in wrongful death cases can be quite large and most people do not understand the income tax laws associated with these cases.
If a plaintiff can prove that a loss has occurred, quantify the loss, and attribute a wrongful death to the defendant, he or she will likely be awarded compensatory damages. As of August 2016, awards for compensatory damages are no longer viewed as taxable income. Your wrongful death attorney will be sure to inform that if you choose to receive annuity payments, there must be a clear outline of future payments in order to avoid paying income taxes on the interest derived from the annuity account.
These non-taxable compensatory judgments may include awards for a physical or mental injury that have been caused by your loved one’s wrongful death.
Physical damages are often awarded in cases in which the plaintiff has suffered medical and/or funeral costs, pain and suffering, or lost wages as a result of a wrongful death. The Internal Revenue Service excludes payment for these damages because they are seen as reimbursement instead of income.
Mental and emotional damages are only excluded from income tax laws when they are equal or less than the amount of medical expenses that have been caused by the distress. These expenses must be attributed to personal physical injury or sickness. Any monetary award above the amount of these expenses may be subject to income tax.
In most personal injury cases, punitive damage awards are not excluded from gross income taxes. Wrongful death cases, however, are an exception to this rule. The federal courts look to each state’s civil statutes as many only allow for punitive damages in wrongful death cases and these cases are usually excluded from income taxes.
Punitive damages are awarded as punishment for those who recklessly or maliciously commit injury to another.
Cases of wrongful death are often as a result of reckless behavior in which the perpetrator has committed an act constituting a substantial risk to the safety of others. If your loved one died due to a willful disregard for his or her life, you may be entitled to a non-taxable punitive award.
Unfortunately, some personal injury is the result of malicious intent on the part of the perpetrator. Your loved one may have been wrongfully killed because the perpetrator had a desire to cause unjustified harm and acted with no regard for human life.
Reprehensible behavior on the part of a perpetrator is another instance in which you may be awarded punitive damages. This award for the wrongful death of your loved one is meant to deter the defendant from committing the morally, and socially, frowned upon act again.
According to federal gross income tax laws, awards for compensatory damages are equal to reimbursement and punitive damages are meant to punish those responsible for the plaintiff’s personal injury. In wrongful death cases, these tax exclusions are broader than other cases, and usually, do not require plaintiffs to pay income tax on these monetary awards.