In the United States, a wrongful death settlement is generally not taxable federal income. You typically do not need to report the settlement amount as income on your federal income tax return.

Exceptions to Wrongful Death Settlement

There are some exceptions and considerations to be aware of:

  • Punitive Damages: If a portion of the settlement is classified as punitive damages, it may be subject to taxation. Punitive damages punish the defendant for particularly egregious conduct rather than compensate the victim’s family. These damages may be subject to taxation.
  • Interest: The interest portion may be taxable if the settlement includes interest.
  • Income-Producing Assets: Any income generated from those assets may be taxable if the settlement includes income-generating assets (such as stocks or real estate).
  • State Taxes: State tax laws vary; some states may treat wrongful death settlements differently. It is important to consult with a tax professional or attorney familiar with your state’s tax laws.
  • Structured Settlements: If the settlement is structured as a series of payments over time, the taxation of each payment may vary based on factors such as interest and principal.

How are wrongful death settlements paid out?

Wrongful death settlements are typically paid out through a negotiated agreement between the parties involved, including the responsible party (defendant), their insurance company, and the deceased person’s family or estate. The payment process can vary based on the specific terms of the settlement and legal procedures in the jurisdiction. 

How to Minimize Taxation on Wrongful Death Suit Amount?

Minimizing taxation on a wrongful death suit amount requires careful planning and consideration of various factors. Some strategies that may help minimize taxation on a wrongful death settlement amount are as follows:

  • Classify Damages: Work with your attorney to allocate the settlement amount among different damages, such as compensatory damages for economic losses (like medical expenses and lost income) and non-economic damages (like pain and suffering). Compensatory damages are often not subject to taxation, while non-economic damages may be partially or fully taxable.
  • Structured Settlement: Opt for a structured settlement instead of a lump sum payment. A structured settlement provides periodic payments over time, which can spread out the tax liability and potentially result in lower overall taxes.
  • Physical Injury Exemption: Certain portions of a wrongful death settlement related to physical injuries or illnesses may qualify for exclusion from taxation.
  • Qualified Settlement Funds: A qualified settlement fund (QSF) may sometimes be established to hold the settlement amount until distribution. This can provide additional time to plan for tax implications.

Need Legal Help? Contact an attorney

A wrongful death lawyer can provide invaluable assistance in navigating the complex process of a wrongful death settlement. They deeply understand the relevant laws, regulations, and legal procedures. Furthermore, they can provide expert guidance on building a strong case and protecting your rights.