Are Wrongful Death Lawsuits Taxable?
A lawsuit may be one option for families to seek compensation for their loss when a loved one perishes because of the negligence of another. However, it may be problematic for families to consider more practical issues, like taxes, when faced with the type of horrific catastrophe that prompts your choice to contact a wrongful death attorney.
The influence that the IRS code has on how your complaint should be filed to maximize the amount of compensation that is available to you will be understood by an experienced wrongful death lawyer. You can reduce the burden of financial difficulties at this trying time by using a lawyer’s expertise.
Do Taxes Apply to Wrongful Death Cases?
A wrongful death compensation award is not regarded as income and is thus not taxable, regardless of whether your wrongful death case compensation is paid at the highest amount in a pretrial settlement or carried to trial.
But because wrongful death lawsuits may award both compensatory (economic and non-economic) damages and punitive damages, it’s critical to comprehend how the IRS differentiates between the two and why being knowledgeable about the impact of tax law is important, particularly in terms of how your attorney should structure your claim.
- Punitive damages are subject to full taxation (except in states where only punitive damages are available, but this does not apply to Texas).
- Taxation may apply to some situations with protracted appeals procedures if any amount of the judgment reflects the interest that has accumulated after the decision was made.
- Prior out-of-pocket medical costs that were deducted from income in the past are regarded as taxable.
- Attorneys’ fees are not tax-deductible, and recovery awards are taxed in full before any legal costs are subtracted.
How Can Beneficiaries of Wrongful Death Reduce Tax Burden?
Although damages are taxed the same whether they are granted through settlements or judgments, wrongful death beneficiaries have access to specific procedures to reduce or postpone tax effects.
- Make sure damages are distributed fairly. Wrongful death cases may include both compensatory and punitive damages. Your attorney should make sure that the judge signs off on whatever percentage of the overall recovery belongs to which group in the settlement or judgment paperwork. If a future tax issue arises, the IRS seldom disregards these allocations.
- Think about the effects of delays: While post-judgment interest accrues while waiting for payment from the defendant, prejudgment interest reimburses a plaintiff for the time they were unable to spend the money they were subsequently granted. A plaintiff is compensated for lost use of the (ultimately) awarded money during the time it takes for an award to be made, whereas post-judgment interest accrues while waiting for payment from the defendant. Even if you get a settlement or judgment that is entirely tax-free, all accrued prejudgment or post-judgment interest—including interest on compensatory damages—is still subject to tax.
- To lower taxes, consider the long term: Accepting a settlement offer and avoiding the additional tax burden of interest that may accrue over a longer timeline may be an appealing alternative, depending on the amount of your compensatory and punitive damages, if the case is on appeal or any other facts of the case. Although there is no clear distinction between taxation for a lump-sum payout and a structured settlement, the tax benefit of structured settlements over the long term may be worth taking into account.
Plaintiffs who obtain lump-sum payouts, whether through a settlement or judgment, may choose to invest the funds to increase their long-term worth. But a wrongful death recovery’s proceeds are only tax-free when they originate from the annuity that was financed at the time of the settlement. Recovery funds are no longer exempt from taxes if they are used to buy stocks, real estate, or finance other investment kinds. Beneficiaries should think about their long-term requirements and rehabilitation objectives.
The best strategy for wrongful death beneficiaries to reduce their tax repercussions will be determined by the specifics of each case, as well as each family’s financial requirements and circumstances, especially in high-value situations.
How Can a Lawyer for Wrongful Death Help?
Due to the complexity of wrongful death claims, you must be well-informed and have an experienced legal team at your side at all times to preserve your rights.
The methods your legal team will employ to demonstrate the defendant’s liability for your loved one’s passing are crucial in accurately estimating damages to maximize the amount of compensation.
Because wrongful death attorneys work on a contingency fee basis, their fee is based on the gross (total) recovery. By being open and honest about their fee, wrongful death lawyers ensure that you always know what to anticipate in terms of your overall recovery award and that we can assist you in determining the most effective strategies for maximizing the value of your case. Even estimating how much tax will be owed is part of this.
We are aware that the legal intricacies associated with losing a loved one further complicate and upset an already trying situation. We provide free, no-obligation case consultations to give you the ability to decide what to do with your future. Our aim is for you to feel more secure and less intimidated after speaking with us.
Contact us to get started claiming the payments you or a family member deserves after a loss of a family member. Don’t wait as filing deadlines or what is also referred to as the statute of limitations do apply and start to run as soon as the accident and/or the death takes place. Talk to an attorney to make sure you understand the statutes of limitations. Call 1-800-883-9858 or fill out the Online Contact Form.