Is a wrongful death settlement considered income in Texas? Generally, the government does not treat these settlements as income. Therefore, the government usually does not tax the entire settlement amount.
However, a portion of the settlement may be subject to taxation in some situations. You can review what parts of your settlement require a tax payment with a wrongful death lawyer serving Texas.
Learn more with our team at the Buzbee Law Firm when you call us or fill out our online contact form.
Is Wrongful Death Settlement Money Considered Income?
While some insurance settlements count as income to the federal government, settlements from wrongful death claims usually do not, according to information provided by the IRS. However, the IRS can legally charge taxes on some portions of a settlement.
When you come into a settlement or large sum of money from a wrongful death lawsuit award, it can help you to rebuild your life and get a fresh start after a tragic loss. Learn more about the taxable portions of a wrongful death settlement so you aren’t surprised by a nasty tax bill from the IRS.
Are Proceeds from a Wrongful Death Settlement Taxable?
Is a wrongful death settlement considered income in Texas? According to the IRS, the money you receive in a wrongful death lawsuit isn’t regarded as taxable income as long as the damages award is for personal injury or physical sickness. The same rules apply to personal injury claims.
Some portions of a wrongful death lawsuit may be taxed separately, however. The IRS considers the following parts of a settlement as taxable income in many cases:
Punitive Damages
The IRS can tax any money awarded as punitive damages. The court awards punitive damages in cases where the defendant’s behavior is considered intentional or grossly negligent. The IRS can tax these funds because they do not directly correlate to a loss your family experienced.
If your punitive damages are a large part of your settlement package, it could have substantial tax implications. However, you may be able to work with your wrongful death attorney and a tax advisor during the settlement negotiations to attempt to reduce these consequences.
Emotional Distress Damages
The IRS can sometimes tax an award for emotional damages. However, the agency can only tax these damages if the distress comes from something other than a personal injury or illness.
For example, awards for emotional distress due to defamation of character would be taxable because there was no physical injury. A wrongful death lawyer can help you review the source of any emotional distress award in your case.
Medical Costs Deducted in Previous Years
The settlement portion allocated for the medical costs you have already deducted from your income tax filings in previous years would be taxed. Since you already claimed a deduction on your taxes for the bills you paid, you would need to pay tax on the money you are now receiving to compensate you for the medical bills.
Accrued Interest Damages
Sometimes, the court system awards families prejudgement or post-judgment interest in a wrongful death case. The IRS considers this kind of accrued interest as income, so you face taxes on it.
What Wrongful Death Benefits do Not Qualify as Income?
In a Texas wrongful death case, the court refers to a plaintiff’s economic and non-economic losses as damages. The IRS does not treat many of these damages as income, meaning you do not have to pay taxes on them.
Examples of compensation that usually does not count as income include funds to cover your:
- Loved one’s lost earning capacity
- Medical expenses related to care received before death
- The loss of care, services, support, maintenance, and counsel
- Loss of love, loss of companionship, loss of comfort, and society
- Loss of inheritance, the amount the person would have saved if they had lived
- Funeral and burial costs
A wrongful death attorney can evaluate your claim and provide you with a projected calculation of the damages based on the actual financial value of your losses and the results of previous similar cases.
You may also receive other forms of compensation, including punitive damages, but the IRS may tax these funds.
Who Has to Pay Taxes for a Wrongful Death Settlement?
When is a wrongful death settlement considered income, and who has to pay taxes on the compensation in this situation? Punitive damages, accrued interest, and emotional damages may all get taxed by the IRS.
Generally, the individual who received the settlement has a legal obligation to pay taxes on these damages. In Texas, you may receive wrongful death benefits if you lose a parent, spouse, or child.
Will You Get a 1099 Form for a Wrongful Death Lawsuit Settlement?
Families who receive compensation through a wrongful death settlement may not receive a 1099 form to fill out for their taxes. Generally, you only receive this form if you receive taxable compensation through the court system or an insurance settlement.
If you received taxable income – such as punitive damages – you must fill out the 1099 form and include it with your taxes for the year. You can work with a tax professional if you need more clarification about the amount of money to include on the 1099 form.
Making a mistake on your tax return can have severe consequences for your family. We understand the stresses already associated with a wrongful death claim, so don’t hesitate to reach out for professional guidance in this situation.
How Can You Avoid Paying Taxes on a Wrongful Death Lawsuit Settlement?
The IRS looks at how the judge allocates damages when they review your tax return. Therefore, the best way to reduce the taxable portion of your settlement is to ask your lawyer to ensure that the court allocates the award to minimize the tax impact.
If the court allocates the compensatory damages as separate from the punitive damages, it may reduce your tax consequences.
You can also ask that the court spread your settlement out over time so you are not skyrocketed into a much higher tax bracket. Receiving payments over time is another way to ensure that you and your family are cared for and that the money will last as long as possible.
You Can Contact a Lawyer to Learn More About Settlement Income
So, is a wrongful death settlement considered income in Texas? In some cases, this life-changing compensation can end financial hardships. However, it can also lead to high taxes if some of it is considered income.
It’s essential to ensure that your lawyer handles the negotiations or the court case with precision so that your settlement can be a benefit that serves you for as long as possible. The Buzbee Law Firm’s wrongful death attorneys understand tax implications.
If you have questions about what part of a wrongful death settlement the IRS can consider income, or if you are considering a wrongful death claim, don’t hesitate to contact us. Call us or complete our online contact form today.
