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Are Income Taxes Paid on Wrongful Death Settlements?

Nursing home abuse is common throughout the United States, and Arizona is no exception.

When bringing a wrongful death claim in Arizona, you will be confronted with many questions, not the least of which is how your personal financial portfolio will be affected. You may ask questions like, “How does a wrongful death settlement work?”, “What damages are awarded in a wrongful death suit?”, and “Are income taxes paid on wrongful death settlements?”.

This guide will help you navigate the intricacies of bringing a wrongful death claim and the tax implications associated with this legal action.

What are Wrongful Death Settlements?

When someone dies and it’s found that their death could have been prevented by a person or organization with responsibility for their care, this is a wrongful death.

In these circumstances a legal case can be brought by the deceased family and a settlement for damages is often paid out by the insurance company of the responsible party or organization.

This means the damages are often substantial and limited by the maximum allowances of the insurance policy itself.

You can read more about how Wrongful Death lawsuits work in our Wrongful Death FAQs article.

What are Recoverable Damages?

The main focus of a wrongful death claim is restitution, or monetary compensation for the financial and emotional loss suffered as a result of your loved one’s death.

It follows that there are two categories of recoverable damages in a wrongful death action:

  1. Financial damages: These are easily quantifiable damages, such as funeral or burial expenses, medical bills, and property damage. These damages can be collected on behalf of the decedent’s estate.
  2. General damages: These are less easily quantifiable, and include pain and suffering to the family of the decedent, and possibly loss of companionship if the claimant is a spouse or child of the deceased. These damages are paid directly to the family members, as the plaintiffs.

It’s at this point that any income taxes will be due on the settlement amounts.

How Damages are Disbursed

The settlement in a wrongful death case may be paid either to the estate or to the family members, or to both, depending on the damages claimed.

When a settlement is paid to the decedent’s estate, it is still subject to the decedent’s liabilities and debts. In these cases it is considered an asset of the estate and is used to pay any remaining creditors. If no creditors exist, the estate is distributed to the beneficiaries.

In many cases, damages paid to the family of the decedent are then divided amongst themselves.

However, in cases where there is disagreement and contention among family members, you may request the court to establish a distribution order. It’s important to note that this order is binding. A court of law will make a distribution determination based on the percentage of the claim entitled to each eligible family member.

Paying Income Taxes on Settlements

The law views most legal settlements as a form of income to the recipient, and most settlement taxes fall under the category of income taxes.

However, there are some settlements where this isn’t the case, including personal injury and wrongful death settlements, these are considered exempt from income taxes.

Settlement Taxes in General

The taxation of settlements can be complicated. In general, when considering if income taxes will apply, the law considers the purpose for which the settlement was intended.

All damages of a civil nature that compensate for a physical injury are exempt from income taxes. However, punitive damages, emotional damages, and interest must have income taxes paid.

When a settlement includes both physical and emotional damages, they are not taxable if the purpose of the settlement was intended to compensate for a physical injury as in a personal injury suit. Personal injury settlements are exempted from income taxes by the IRS.

This means that even if your personal injury settlement includes a pain and suffering award, the full settlement will not be taxable.

Wrongful Death Settlement Taxes

For most intents and purposes, wrongful death settlements are treated the same way as personal injury settlements when it comes to income taxes.

Wrongful death actions are also considered an exception when it comes to the taxation of punitive damages.

The I.R.C. § 104(c) states that income taxes: “shall not apply to punitive damages awarded in a civil action…which is a wrongful death action.” 

Therefore, when punitive damages are paid as part of a wrongful death civil action, they will not be considered taxable income.

The IRS specifically states, “If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.”

The purpose of the wrongful death settlement, in the eyes of the law, is to provide reimbursement to correct a wrong.

However, you should be aware of the following exceptions:

If it pushes the estate over the inheritance tax threshold

When the settlement amount pushes the total value of the decedent’s estate over the federal threshold for the estate tax exemption. In 2020, this estate tax limit was increased to $11.58 million.

When considering estate taxes, it’s essential to pay attention to both state and federal law.

When there is no estate tax placed by the state, federal estate taxes are the only ones that apply.

Since Arizona does not have an estate tax, as long as the estate is held in Arizona, you will only have to contend with federal estate tax limits.

If medical expenses were claimed as tax deductions on a previous year’s income taxes.

In situations where deductions were made in the past for certain medical expenses, the IRS states:

“If you receive a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical expenses to each of the years you paid medical expenses.”

To handle this properly, you will need the decedent’s prior years’ tax returns to calculate the total medical expense deductions and any tax benefit obtained from these deductions.

Understanding Your Tax Liability

Tax laws are inherently difficult to understand, so it is always advisable to speak with an Arizona attorney who is experienced in wrongful death settlements.

Seek representation early as possible, as a knowledgeable attorney can bring actions that will be taxable separately from those that will not. This will simplify your filing when you prepare your income taxes.

An Arizona wrongful death attorney can also discuss your particular situation, help you to secure a reasonable settlement, and provide you with qualified tax assistance as you manage this difficult situation.

They can help you better understand your tax liability so that if you owe taxes on your settlement you can cover your tax bill without affecting your personal finances.

Wrongful Death Settlement Tax FAQs

My mother’s death occurred in another state. Which state’s tax laws apply?

You will need to pay attention to the laws of the state in which your mother lived.

Currently, Washington, Oregon, Minnesota, Illinois, New York, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, and District of Columbia all have an estate tax.

If your mother resided in one of these states, the estate tax laws of that state apply. Each state has its own tax limit, which will help you in understanding whether the estate will be taxed and at what rate. In the absence of a state tax law, federal tax law exemptions apply.

How much time do I have in which to file a nursing home abuse wrongful death claim?

After the death of a loved one, A.R.S. § 12-542 establishes that you may file a civil suit for wrongful death within two years of the date of death.

It’s advisable to seek council early, as an experienced Arizona wrongful death attorney can help you bring your claim, obtain the maximum settlement, and help you understand the nuances of these complicated laws.

Waiting too long to seek representation or file your claim may mean you or your attorney will have less time to thoroughly gather information and evidence, and may weaken your case.

I’m not sure I can emotionally handle a court battle to settle my claim. What can I do?

The thought of going to court to fight for your rights after losing a loved one might be overwhelming. It’s natural to feel scared and vulnerable at a time like this. Not to mention that pursuing a case in court can add stress in an already trying time. Keep in mind that your case may never go to court. If the insurance company for the at-fault party admits to fault, they will offer a settlement outside of court.

However, if you wish to stay out of court you will have to negotiate your settlement with the insurance company representing the at-fault party. In order to do this, preparation is required on your part. You will need to first determine the value of your claim and gather evidence to support it.

If the settlement initially offered to you is not acceptable or does not compensate your damages, you may need to consult with an attorney to help you make your case. An attorney can handle all negotiations on your behalf. Having settled many such cases in the past, they will be familiar with how insurance companies work and will know how to earn the best settlement.

I’m worried the settlement will push the estate over the exemption. Can I pursue some damages now and some later?

There is no legal way to get around paying estate taxes if they are owed. Once you reach a settlement in your case, that settlement will be binding. This means you will be unable to claim later that the settlement was insufficient or did not adequately compensate your damages.

Additionally, when you sign a settlement agreement, you will be releasing the at-fault party of future liability for the wrongful death in question. You cannot come back later and pursue damages for the same case.

Get Help Now 

At Phoenix Accident and Injury Law Firm near you, we have more than 15 years of experience helping clients obtain compensation for wrongful death. When you’re ready to talk, please contact our office to arrange a free initial consultation by phone or at our Chandler office, conveniently located near you.

If your loved ones have passed away due to nursing home abuse, contact Phoenix Accident and Injury Law Firm in nearby Chandler, AZ to speak with an experienced personal injury attorney. We provide personal injury legal services to clients in your area including ChandlerGilbertMesaScottsdale, Tempe, and Peoria.

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a month ago

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a year ago

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a year ago

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2 years ago

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2 years ago

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2 years ago

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2 years ago

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