Dealing with a wrongful death lawsuit is difficult enough without the Internal Revenue Service (IRS) getting involved. But if you have uncommon circumstances to your wrongful death settlement, then you might have to anticipate some complications from this least-popular federal agency.
The good news is that wrongful death lawsuit settlements are not taxed by the IRS in a normal situation. If you get $100,000 through a settlement, then that amount should be yours. However, this is not always the case for the entire settlement. Some portions of it can be taxed by the IRS.
The IRS can tax these portions of your wrongful death settlement:
- Amount used to cover medical bills and related costs that were deducted from your income in previous tax filings.
- Punitive damages rewarded to you purely to punish the defendant for criminal wrongdoing or egregious negligence.
- General damages rewarded to you if you did not suffer an injury or illness yourself.
Overall, the IRS does not tax compensatory damages, which are those paid to a claimant or plaintiff as compensation. The IRS is mostly concerned with taxing sources of income – hence the name – and compensatory damages are not income.
Can the IRS Challenge Your Settlement?
Before you celebrate a large wrongful death settlement that seems like it will avoid taxation, you should know that the IRS has the power to challenge the arrangement of your settlement. For example, the IRS can argue that a larger portion of the settlement should be considered punitive damages instead of general damages because punitive damages are taxable. If the IRS is successful in this argument, then more of your settlement will be taxed.
Your wrongful death attorney can help you if the IRS wants to tax your settlement. As the legal professional who worked on your case, they can explain why your settlement was structured the way it was and argue against a restructuring that would take financial benefits from you. There might also be wrinkles in the law specific to your state that can affect how much of a settlement can be considered as non-income. An attorney can help you understand those issues as well.
Dunk Law Firm represents wrongful death clients across the nation. No matter where you call home, we can help you seek the most compensation through a claim or lawsuit and protect it from unjust IRS taxes. Contact us today.