What Are Wrongful Death Damages?
When someone dies as a result of another party’s negligence, the deceased person’s estate may file a wrongful death lawsuit against the party they believe to be at fault. If the court agrees, it may award wrongful death damages, which are financial penalties that the negligent party pays to the heirs. While most of these awards are tax-free, there are some exceptions to the usual rules.
What Are Compensatory Damages and Are They Taxable?
The Internal Revenue Service (IRS) does not tax any amount awarded for illness or injury. Wrongful death awards are in this category since the court finds that an individual or other legal entity fully or partially caused a condition that led to death. As long as the damages are awarded as compensatory damages, meaning as compensation for some form of pain or suffering, they are tax-free. Compensatory damages may include reimbursement for out-of-pocket medical expenses. Though no amount of money can replace a loved one, compensatory damages are supposed to make survivors “whole” to the extent possible.
In rare circumstances, some portion of your compensatory damages might be taxable. If you took a tax deduction in a prior year for medical bills and then receive reimbursement from a court settlement, that portion of the settlement is subject to taxation. If you only took the standard deduction and did not itemize, then you don’t have to be concerned about this.
What Are Punitive Damages and Are They Taxable?
Punitive damages, also known as exemplary damages, are different from compensatory damages. Punitive damages are to punish the negligent party for particularly egregious or irresponsible behavior. The amount may be include awards for emotional distress, lost wages, and penalties, among other factors. These amounts are taxable as income according to the IRS.
Again, a few situations do occur where the IRS deviates from the rules related to punitive damages. Some states only allow for punitive damages in wrongful death cases. In those states, the IRS defers to state law and does not tax those amounts.
Where Can I Get More Help with Questions About Wrongful Death Damages?
If you’ve lost a loved one in a wrongful death situation, you may be overwhelmed with emotions and unanswered questions. Because state laws impact wrongful death damages, you need the professional help of a competent and knowledgeable wrongful death attorney in Charlottesville, VA. Capable counsel can help you develop a realistic understanding of your case and the tax implications.
Thanks to MartinWren, P.C. for their insight into personal injury claims and wrongful death damages.