While your wrongful death settlement can help ease the financial pain of losing a loved one, it is hard to be happy if you are worried about the tax implications.
Tax implications should be the last thing on your mind when deciding whether to bring a wrongful death lawsuit. However, when you do have questions or need help, you need the assistance of a skilled wrongful death lawyer. Contact Shelly Leeke Law Firm for a free consultation and case review.
What Is Wrongful Death?
Wrongful death is a cause of action or a legal theory that you may sue under. These actions arise when a person is killed because of the negligence or wrongful acts of another person. A lawsuit can be brought by any person that is a beneficiary of the person who died, such as their spouse, children, parents, siblings, or other family members.
Wrongful death settlements are the largest of all settlements in the law. They can be in the hundreds of thousands or millions of dollars. This is why many people worry about what sorts of taxes, if any, they will have to pay on their wrongful death settlements.
Is a Wrongful Death Settlement Federally Taxable?
For the most part, no. As far as the Internal Revenue Service (IRS) is concerned, generally, wrongful death settlements, or any settlement for personal injury, are not considered income and are thus not taxable.
However, because this is a tax rule created by Congress and the IRS, it is unsurprisingly very complicated, and there are many exceptions and complications. Some of the complications involve the type of damages that you received in your settlement, while others involve the amount or source of the damages (who pays them).
In South Carolina, if your deceased loved one died in a work accident, your claim must be brought under workmen’s compensation. Workmen’s compensation is a state-mandated program where each employer must hold insurance that pays a certain amount of money to an employee, or their beneficiaries, for injuries suffered at work.
According to the IRS, any award that you receive under workmen’s compensation is not taxable. However, this exception does not apply to retirement pensions or annuities. It only applies to the amounts received for the injury.
Personal Injury Damages
Any damages that you receive for the actual injury to your deceased loved one are not taxable, whether those damages are paid in a lump sum or in periodic payments. The “damages” that you receive are any amount that you receive through an award from a court pursuant to a lawsuit or a settlement.
However, any amount that you receive for emotional distress does not count as damages for a personal injury. For that reason, those damages are taxable.
Accident or Health Insurance
Any amount that you receive through an insurance policy for accidents or through your normal health insurance is not taxable. However, this does not apply unless you paid for the insurance policy. If someone else, such as your employer, was the only contributor to the insurance policy, this exclusion does not apply.
Military or Public Health Service Pensions
Pensions or annuities that you receive as a result of your deceased loved one’s service in the military, Coast and Geodetic Survey, or the Public Health Service do not count as income and are thus not taxable. There are really no exceptions to this rule. The IRS is very hesitant to tax federal service benefits.
If you deducted medical bills from your taxes in previous years, any amount that you receive for those same medical bills is taxable. This is because the IRS believes that you have already received a tax exemption for these medical bills, and it would not be fair to give you a second one.
This exception only applies to medical bills that you have paid and deducted from your taxes in previous years.
Punitive Damages and/or Attorney’s Fees
If you receive any amount that constitutes punitive damages or reimbursement of your attorney’s fees, these amounts do not count as personal injury damages and are taxable.
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How Do I Know What Parts of My Settlement Are for Each Type of Damage?
ld know if the settlement amount is for anything other than the non-taxable personal injury reimbursement is the assignment of awards. An assignment is a process by which a jury awards a certain amount of money for each category of damages.
However, in settlement agreements, assignment is not necessary, and the parties can decide what the settlement is meant to compensate you for. This means that your wrongful death attorney can write the settlement agreement with the other party in such a way that protects your award from taxes.
Can the State Tax My Wrongful Death Settlement?
The State of South Carolina, and every other state, are bound by the IRS’s definition of “income” under the IRS’s tax code. This means that the State cannot decide that wrongful death settlements are “income” when the IRS says that they are not.
For this reason, the State of South Carolina cannot tax anything that Congress or the IRS has decided is exempt from taxes. That means that most of your wrongful death settlement is safe from State taxes as well.
How Will My Lawyer Help Me?
When it comes to the tax implications of wrongful death settlements, having a skilled attorney on your side can make the difference between paying no taxes and paying a substantial amount of taxes. This is because your tax burden on a wrongful death settlement will, for the most part, be based on how well the settlement agreement is written.
When you have lost a loved one due to someone else’s bad acts, you need the assistance of a skilled and professional attorney. Contact Shelly Leeke Law Firm today.