Taxation of Wrongful Death Damages

Wrongful Death Attorney

Nothing can bring back a loved one who dies as the result of someone else’s negligence or willful actions. The best the responsible party can do is compensate you monetarily for your loss. Family members may receive awards amounting in millions of dollars or more as a result of a wrongful death suit. If you receive such a large sum as damages, you may have practical concerns as to how it will affect your taxes.

Different Types of Damages

A wrongful death lawsuit may result in more than one type of monetary award. Two of the types of awards you may receive include compensatory damages and punitive damages.

Compensatory damages consist of money paid to you to make up for a loss. The losses you may suffer as a result of a loved one’s wrongful death include pain and suffering, loss of livelihood, loss of companionship, and so on. Due to the magnitude of these losses, the compensation can often be significant.

Another type of award you may receive is punitive damages. The purpose of punitive damages is to make a significant impact on the person responsible for the wrongful death in the interest of imposing a punishment on him or her, as well as trying to deter other people from undergoing the same types of actions that may have similar results.

Different Tax Rules

Because punitive and compensatory damages are different from one another, the IRS has different tax rules that apply to each.

You will have to report any punitive damages that you receive as the result of a wrongful death suit as taxable income. The instructions that accompany the tax form you are using will inform you where to enter the information on the form.

However, if you receive compensatory damages in a wrongful death suit, these are not taxable and so you do not need to report them to the IRS. The reason for this is that compensatory damages are not income but a way to make up for previous losses. Court awards for physical injury or illness, including those resulting in the death of a loved one that prompted you to bring the suit, are not taxable according to IRS rules.

Often, the award in a wrongful death case may include both punitive and compensatory damages. If that’s the case, the IRS has guidelines in place to determine which portion is taxable and which is not.

A wrongful death suit can be extremely complicated, which is why it is helpful to have an experienced attorney on your side to advocate for you.

Resource: Charlottesville, VA Wrongful Death Attorney, MartinWren, P.C.