May 22, 2020

Are Wrongful Death Cases Subject to Income Taxes?

Personal Injury Settlement Check.
Picture of a man holding a large settlement check he has won in a trial in civil court proceedings after the other party agreed to settle the case.

The short answer is no! But we've heard it since our youth, "the only that is certain in life is death and taxes." But in some cases, that old saying does not always hold true.

"Taxes are compulsory payments charged to all persons and enforced by the sovereign state, local and federal governments. Purportedly, taxes pay for government services and administration. Taxes may be levied on any entity or person when they purchase goods, services, or other items such as earned income and so forth. So taxes can be levied on consumers in a wide range of transactions. (See also)."

Many injured victims in California have suffered the calamity of losing loved ones. So this could be a grandfather, child, husband, or wife, due to the negligence of another. Their providing wage earner has gone to the grave. Now they either get an attorney and sue or go broke.

Often, money awards are in the hundreds of thousands or even millions of dollars range. In any case, amounts will come due. These include money for the dead person's hospital and nursing home expenses.

But are wrongful death award amounts subject to tax, and if not, why not? What about punitive damages?

This article explores the tax consequences of a winning death case in the Golden State.

Table of Contents:

Caveat - Always Speak to a Tax Attorney Before Settling.

At the outset, we do not say we are tax attorneys. We merely cite the IRS code and dissect what it says. Other parts of the judgment, such as punitive damages, have tax consequences. So it remains important to consult an experienced attorney.

But a tax preparer should also get contacted. That also helps settle and structure estate matters.

What Does the Tax Code Say About Wrongful Death Taxation?

California law clearly says personal physical injuries stay excluded from taxable income. Federal law proves in accord. But the caveat remains punitive awards. Internal Revenue Code Section 104(a)(2) says punitive damages remain taxable.

However, those costs may get excluded under a state's statutes for wrongful death. (§ 104(c)). But this only applies if the damages occurred on or before September 13, 1995.

The Conference Committee is cited by the CCH Federal Tax Service to report to P.L, 104-188 (1996) H.R. Rep. No. 104-737. This concluded that non-punitive damages for wrongful death would stay excluded as income. (See also Section 104 of the Internal Revenue Code).

The Wrongful Death Tax Statutes And Codes.

The descriptive language under Letter Ruling 200029020 and § 104(c) support this decision. (Revenue Rulings 69-8, 54-19, 75-127, 75-126, 83-44).
 Damage amounts awarded under a wrongful death statute may get excluded from the taxable estate.

However, general amounts for the dead person are a little bit different. But medical expense refunds may be taxable. So the estate in a survival action is taxed in that case.

Our advice? Get a tax attorney!

As you can see, there a distinction exists between the survivors and the estate. Hence, when it comes to the decedent's pain and suffering, you would likely stay on the hook with the FTB.

Your pain and suffering or medical bills get excluded as taxable. But the decedent's refunds and their pain and suffering seem taxable.

IRS Circular 230 Disclosure: As under U.S. Laws, readers and viewers of this material, please be advised that written tax advice, perceived or otherwise, is not "advice." (and reliance on this article is not authorized).

In conclusion, this article discussed the tax consequences of a winning wrongful death lawsuit. We found that punitive awards can create a taxable event.

Also, we discovered that survivor's cases might be taxable. But regular damages would remain excluded from income. But again, state and federal rules differ. So consult a tax specialist.

Last, no taxpayer may rely on this article to avoid penalties. But if you wish to learn more about death claims law, contact Michael Ehline. He is a negligent death attorney in Los Angeles.

Other Sources:

You can reach out to a California personal injury lawyer near you or find another local location.