Do You Have to Pay Taxes on Lawsuit Awards?

As a year comes to a close, people start to think about filing taxes. It’s important to accurately and honestly disclose all financial gains and losses from the year. People who have been involved in a lawsuit are particularly interested to know whether their settlement money is taxable. The amounts from wrongful death lawsuits, in particular, can be significant. Tax accountants and wrongful death lawyers can both advise you on these questions. It should give you peace of mind to know that in most cases, you shouldn’t have to pay taxes on wrongful death damages.

Wrongful Death Lawsuit: An Overview

If someone in your family has died because of the negligence, carelessness, or willful disregard of another party, you may be entitled to a financial award. Surviving family members file these suits to help pay for the medical costs of trying to save the person’s life as well as funeral and burial costs. Financial burden could also come to the family because the decedent is no longer alive to provide financial support now and in the long-term future. The family could lose a potential inheritance as well. Wrongful death damages seek to claim the money survivors have lost and will lose going forward.

Typical Examples

Wrongful death lawsuits cover a broad range. Some deaths result from car accidents where another driver hit the victim due to being under the influence, breaking the law (speeding, running a red light, etc.) or simply not using good judgment on the road. Other incidents are from medical malpractice, unsafe workplaces, or criminal activity.

Awarding a Settlement

The court will look at several factors to determine how much money goes to the plaintiff if that party wins the settlement. The nature of the incident and the offending person’s actions will help decide the settlement. The court will also consider pain and suffering as well as punitive damages.

Nontaxable Money

Compensatory damages are not taxable. This includes money awarded to the surviving family to cover medical costs, funeral expenses, and the loss of future earnings. You should not have to report this money to the IRS on your taxes.

Taxable Money

One exception to wrongful death settlements is if you receive money for punitive damages. The court may award you this settlement as a way to punish the offending party. Unfortunately, you will have to pay taxes on this award.

Be aware of the wrongful death process and when you will and won’t have to claim settlement money on your taxes. Consult with a wrongful death lawyer if you have questions or concerns.