It seems like the IRS has its hands in everything, and upon receiving your wrongful death settlement, you may discover that it even has its hands in the death of your loved one. According to the IRS, lawsuit settlements ARE taxable, with few exceptions. Wrongful death cases are not one of them. If you were recently awarded compensation for the wrongful death of a loved one, reach out to the Orange County wrongful death attorneys at RMD Law to learn more about what to expect come tax time and to discuss what, if any, options you have for protecting your funds from the government.
When Your Wrongful Death Settlement is Taxable
Though wrongful death settlements are taxable, only certain parts of them are. Compensation awarded via lawsuits is generally categorized. For instance, a jury might award a plaintiff $150,000 in compensatory damages, $100,000 in non-economic damages, and $75,000 in punitive damages. The IRS’s audit technique guide states that the following types of damages ARE taxable:
● Interest on settlements;
● Compensation related to lost profits or wages; and
● Punitive damages.
Punitive damages are taxable because they are meant to punish the defendant and serve as a deterrent for similar future behavior. They are not meant to be compensatory, which means the plaintiff does not technically need the money. Compensation related to lost profits and wages is taxable for obvious reasons: the money would have been taxed regardless of whether or not the victim lived or died.
When Your Wrongful Death Settlement is Not Taxable
There are certain damages that the IRS will not touch. Those include:
● Compensation related to illness or physical injury, as these types of damages are considered to be compensation for loss and not “income”;
● Damages meant to cover the cost of medical care, medicine, and equipment; and
● Compensation meant to compensate aggrieved family members for emotional duress and mental anguish that resulted from the injury, illness, and death of a loved one.
How to Report Your Settlement
You will need to report your award via a different form than your W-2. The IRS asks plaintiffs to report the compensation via an IRS 1040-21, which is considered an “other income” sheet. In addition to reporting your income via this form, you should also send along a detailed summary of your winnings and a description of how your funds were allocated. If your funds were transferred to an estate, they may be subject to estate taxes.
Discuss Your Situation With an Experienced Attorney
The last thing you need to deal with after finally settling a wrongful death suit is the IRS. Unfortunately, however, if you fail to report your funds in a way that the IRS deems fit, you may find yourself the victim of a tax audit. If the audit reveals discrepancies between your earnings and what you reported, you may be subject to fines and other penalties. At RMD Law, our Orange County wrongful death lawyers do not want you to have to deal with any more hardship than necessary. We can help you assess your award and make sure that you fill out the IRS form completely and accurately. Call our office today with the guidance you need at this difficult time in your life.