Personal Injury Lawyer
It seems like everything related to filing your taxes is complicated and hard to understand. Filing a wrongful death lawsuit is also quite complicated, which means it is especially complicated to consider whether or not the settlement from the suit is taxable. The truth is that some kinds of damages are taxable and some are not. This means it is very important to know whether you are on the hook or not when tax season rolls around. This guide will fully explain everything you need to know.
What Is Not Taxable?
First things first, some things are not taxable. Any damages that are compensating some kind of financial loss are usually not taxed. After all, you are simply being compensated for what is rightfully yours. The lawsuit should not make it so these items need to be taxed unfairly. For example, compensation for the medical bills the victim paid prior to death would not be taxed.
There is one major exception to this rule: lost wages. This is the income that the victim would have earned if the incident had never taken place. You can be compensated for this amount, but the income would have been taxed. Just like it is not fair to pay taxes on those medical bills compensation, it would not be fair to not pay taxes on that income.
What Is Taxable?
Most types of damages in a wrongful death lawsuit are taxable. Anything that is not compensation for a financial loss should be taxed. The IRS considers these to be forms of income, and must be taxed just like any paycheck. This includes:
- Compensation for pain and suffering
- Compensation for emotional distress
- Compensation for loss of companionship
- Punitive damages
Punitive damages are common in wrongful death cases. These types of damages refer to payments that the defendant must make simply as punishment. The judge may decide that the amount the defendant must pay as compensation is not enough to punish him or her. In these cases, extra damages are assigned which do not correspond to losses, but are punishment in and of themselves. These types of damages are also taxed.
If 100 percent of your settlement is not taxable, you do not even need to report it when you file your taxes. If any part of it is taxable, however, you need to report the full amount. You can claim whatever portion is not taxable as a deductible. Because this can be quite complicated, it is a good idea to speak with a tax professional and a wrongful death attorney, like a Wrongful Death Lawyer, in Lakewood FL.
Thank you to the experts at David & Philpot, P.L., for their contributions to wrongful death law.