Wrongful death settlements can be complex, especially when it comes to tax implications. This article provides a clear explanation of the tax rules in California, including the difference between survival actions and wrongful death actions. If you’re dealing with a wrongful death claim, contact GJEL Accident Attorneys for expert legal guidance.
One question we get often is whether wrongful death settlements are taxable. The general rule of thumb is that wrongful death settlements are not taxable.
According to the Internal Revenue Service (IRS) under IRS Rule 1.104-1, the settlement amount received from a wrongful death settlement is not taxable. This is because the IRS classifies it as part of a claim stemming from personal injuries or physical illness.
The Internal Revenue Service considers any portion of a settlement or award that is “compensatory” as non-taxable. These compensatory damages are intended to compensate a party for a loss that he or she has already sustained, so cannot be considered “income” for tax purposes.
In most wrongful death cases, compensatory damages include both economic and non-economic losses suffered by surviving family members. Economic losses may cover funeral and burial expenses, medical bills incurred before the victim’s death, and the loss of future financial support the deceased would have provided. Non-economic damages often include loss of companionship, comfort, care, affection, and guidance that family members would have received from the deceased.
Unfortunately for plaintiffs, the analysis does not stop there.
Many survival actions result in significant punitive damages, intended to punish a party for their conduct and discourage others from engaging in the same or similar conduct.
When these actions are brought against a large corporate defendant, punitive damages are often substantial, in order to make a noticeable impact on the defendant’s financial situation.
In determining the portion of a settlement or award that is taxable, the IRS will analyze the nature of the claimed damages. Furthermore, the IRS has the legal authority to challenge the way a settlement is structured in cases where the ratio of punitive to compensatory damages does not reflect the “economic substance” of the settlement.
Exceptions may Apply to the Taxation of Wrongful Death Settlements
As is often the case in legal matters, there are certain cases where an exception will apply and punitive damages will not be considered taxable income. Many considerations depend on your state, and lawyers for wrongful death can help you navigate these issues.
The IRS does not tax your wrongful death lawsuit settlement. However, under specific circumstances, other portions of your settlement may be taxable. For instance, the portion of your settlement you received for medical bills and expenses deducted from your income in previous years could be taxed.
Other specific portions of a settlement may also be taxable depending on how the damages are categorized. For example, punitive damages are generally treated as taxable income by both the IRS and California tax authorities because they are meant to punish the defendant rather than compensate the survivors.
In addition, any interest earned on the settlement such as pre-judgment or post-judgment interest that accrues while the case is pending or after a verdict is typically considered taxable income.
In rare situations, damages awarded for emotional distress that is not directly tied to a physical injury or illness may also be taxable. However, most wrongful death claims arise from a physical injury that caused the death, which usually keeps these damages within the non-taxable category.
A skilled attorney can help you navigate the tax implications of your wrongful death settlement.
But what about California state taxes?
Do you have to pay California state taxes after a wrongful death settlement?
California law often entitles individuals who have lost a loved one because of preventable accidents or the intentional acts of another person to recover significant financial compensation.
There are two separate legal actions available to surviving family members, allowing survivors to pursue various and mutually exclusive damages:
Survival Action Tax Liability
As described in California Code of Civil Procedure §377.30, survival actions are brought by the personal representatives of a decedent’s estate and allow them to pursue any personal injury claims that the decedent could have pursued had he or she lived.
The damages available in these actions include punitive damages, medical expenses, lost income, and property damage. Any damages recovered become part of the deceased’s estate and are distributed to the family according to California probate laws.
Because survival actions recover damages the deceased person could have claimed before death such as medical expenses, lost wages, or pain and suffering before passing some portions may be treated differently for tax purposes. In particular, punitive damages recovered through a survival action are generally taxable.
Wrongful Death Action Tax Liability
These actions are brought under California Code of Civil Procedure §377.60 and allow surviving family members such as spouses, siblings, parents, and children to bring a lawsuit to recover for their losses.
Examples of damages that are often successfully sought in California wrongful death lawsuits include funeral expenses, loss of household services, loss of financial support, and loss of companionship from a spouse or family members.
These damages are considered compensatory because they are meant to reimburse surviving family members for the financial and emotional losses caused by the death. As a result, compensation for funeral costs, loss of financial support, and loss of companionship is generally excluded from taxable income under federal and California tax rules.
The amount of compensation that family members often recover in these kinds of legal actions can easily rise into the millions of dollars. For this reason, many people who are considering a wrongful death or survival action wonder if they can avoid incurring a significant tax liability when they receive a settlement or award.
In California, Your Wrongful Death Award may be Taxable
Under California law, a portion of the award from a survival action may be taxable, as state law allows for punitive damages in wrongful death lawsuits.
On the other hand, as wrongful death damages are limited to compensatory damages, any settlement amount or award you receive may be treated as nontaxable. Of course, for specific information regarding your case, you should speak with an attorney familiar with representing clients in your position.
In response to whether a wrongful death settlement is considered income: Typically, it is not viewed as income. Consequently, in the majority of situations, such settlements are not subject to taxation, as per the Internal Revenue Service (IRS).
Strategies That May Reduce Tax Liability in a Wrongful Death Settlement
Careful settlement allocation can play an important role in reducing tax exposure. When a settlement agreement clearly specifies that most of the compensation is for non-taxable compensatory damages, such as loss of financial support or companionship, it may help limit the portion treated as taxable income.
Some families also consider structured settlements, which distribute compensation over time rather than as a single lump sum. While this approach does not eliminate taxes on taxable portions such as punitive damages or interest, it can sometimes reduce annual taxable income and provide long-term financial stability.
Need More Advice? Talk To Us
Navigating the legal and tax implications of a wrongful death claim can be overwhelming, especially during a time of grief. If you’ve lost a loved one due to someone else’s negligence, it’s crucial to seek legal representation from experienced attorneys who can guide you through the process and protect your rights.
GJEL Accident Attorneys have a deep understanding of California’s wrongful death laws and can help you understand the tax implications of any settlement or award. Don’t hesitate to contact us today for a free consultation and let us help you seek justice and fair compensation for your loss.
If you have lost a loved one in a preventable accident or because of someone’s wrongful conduct, you should call our California wrongful death lawyers today. Our skilled lawyers are dedicated to protecting the legal rights of survivors and understand how important it is for families to obtain closure through a successful legal action.
To schedule a free consultation with one of our lawyers, call our office today at 866-218-3776.
This post was written by Andy Gillin and updated on 3/21/23
