You have filed a wrongful death claim for your loved one and you are wondering if you will have to pay a chunk of the money to the government in taxes. To determine whether a wrongful death settlement is taxable, you need to consider both state and federal taxes as well as what the settlement covers.
Is there state income tax on wrongful death settlements in Florida?
No. The state of Florida does not have state income tax.
Is there federal income tax on wrongful death settlements?
It depends on what the settlement money covers. In most cases, compensation for physical injuries are exempt from taxation, as are emotional distress and mental anguish so long as they stem from the physical injury. This means that the settlement you receive for medical expenses will not be subject to taxes.
However, if you took a deduction on the medical expenses you received compensation for, you must include your settlement as income.
In most cases, lost wages and lost earnings will be subject to tax.
You must report the interest on your settlement as income.
If the court awarded you punitive damages, you do not need to report those as income (in most cases).
For example, Lisa and her husband Mark are driving down the road when a drunk driver slams into their car, killing Mark. Lisa can file a wrongful death claim to recover the damages she lost due to her husband’s death.
Some of the damages she recovers might be taxable, while others might not be. For example, she receives compensation for the following:
- Her husband’s medical bills: Non-taxable
- Her husband’s lost wages and lost earning capacity: Taxable
- Her husband’s pain and suffering between the injury and death: Non-taxable as it resulted from his own personal injury
- Her husband’s mental anguish between the injury and death: Non-taxable as it resulted from his own physical injury
- Emotional distress: Taxable as it did not result from her own physical injury
- Punitive damages: Usually non-taxable (per IRC § 104(a)(2))
- Property damage: Can be taxable or non-taxable depending on your basis in the property (i.e., what the property is worth)
Is there any way I can avoid paying taxes on my wrongful death claim?
Parties in a claim are allowed to designate how much of the settlement amount is for each type of damage, within reason. Obviously, you cannot claim $3,000,000 in medical bills and $5 in emotional distress just to avoid taxes.
For example, Lisa files a claim against the at-fault driver in the fatal drunk driving accident. She files for her husband’s medical bills, his pain and suffering, her emotional distress, his emotional distress, and for punitive damages. The parties settle the claim for $1,500,000. In the settlement documents, they allocate the $1,500,000 as follows:
- $100,000 for her husband’s medical bills
- $200,000 for her husband’s lost wages and lost earning capacity
- $300,000 for her husband’s mental anguish before death
- $300,000 for her husband’s pain and suffering
- $100,000 for her emotional distress at the loss of her husband, and
- $500,000 in punitive damages
Only her emotional distress and her husband’s lost wages and lost earning capacity are taxable in this settlement. By only claiming $100,000 in emotional distress and $200,000 in lost wages, $1,200,000 is non-taxable.
Note: If Lisa also filed a personal injury suit, she could file for higher emotional distress damages in that suit as they are non-taxable when they stem from your own injury.
Call a Fort Lauderdale wrongful death lawyer for help today.
The taxation of injury and wrongful death settlement is complicated. We recommend you speak with a tax professional to determine how this might affect you.
While we cannot give you advice on how you could avoid taxes on a wrongful death settlement (we are not tax professionals), we can work to get you the best settlement possible to cover what you have lost.
A wrongful death can be the most difficult time in your life; do not spend your time worrying about how to pay bills or replace your loved one’s lost wages. We will fight to get you all the compensation you deserve. Call us today at 954-541-3194 for your free, no-obligation consultation.