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  • Writer's pictureRobert Schuerger

Are Wrongful Death Settlements Tax Deductible? | Tax Break

Grieving family members may file a wrongful death claim against the negligent party's insurance company to recover the damages incurred following the loss of their loved one. Upon fighting the case successfully, they may receive a large sum of money, which is often referred to as a settlement.


It's important to understand that certain aspects of the wrongful death settlement amount remain tax-free, while the affected party may have to pay taxes on the rest. It is also important to know what damages can be claimed in a Texas wrongful death lawsuit.


Schuerger Shunnarah Trial Attorneys can guide grieving family members in Houston, Texas, on the tax implications to help avoid trouble with the IRS.


Are Wrongful Death Settlements Tax Deductible?

Are Wrongful Death Settlements Tax Deductible?


The Internal Revenue Service (IRS) requires all individuals to pay taxes on their income. However, the Federal Register IRS Rule 1.104-1 treats wrongful death settlements as claim proceeds and not income. This means that the claimants or plaintiffs do not have to pay taxes on them in Texas. Schuerger Shunnarah Trial Attorneys can also answer questions like How are wrongful death settlements paid out Texas?


It's important to note that although a wrongful death settlement is generally not taxed in Texas, some aspects of it are.


Who Is Eligible to Receive Wrongful Death Settlements in Texas?


Although losing a loved one can be a traumatic experience, not everyone has the right to recover wrongful death settlements in Texas. Under the law, the following individuals are eligible to pursue a claim or lawsuit after the decedent's death:

  • Spouse

  • Parents

  • Children

Those who share any of the above-mentioned relationships with the decedents may be able to file a wrongful death claim to recover the damages.


It's essential to bring a civil action against the negligent party's insurance company within the time frame mentioned in the statute of limitations.


Is Medical Expenses in a Wrongful Death Settlement Taxable?


After a claimant successfully negotiates a fair settlement with the negligent party's insurance company, they do not have to pay taxes on the following components of the compensation:

  • Payment for physical injury or illness

  • Emotional distress damages arising from the injury or illness

  • Medical bills and other out-of-pocket expenses

  • Lost wages

  • Funeral expenses and burial costs

Although the claimants do not have to pay taxes on the above-mentioned components of a wrongful death claim settlement, they do have to report these amounts according to the guidelines established by the IRS.


An experienced wrongful death attorney can help structure the settlement to minimize the tax liability and ensure maximum money for the grieving party.


What Are the Types of Damages That Are Taxable in Texas?


When a claimant or plaintiff receives the proceeds from a settlement or a wrongful death award, they must pay taxes on certain parts of it. These include the following:


Punitive Damages

When a wrongful death suit heads to court, the judge may award punitive damages as a means to punish the defendant and deter others from committing similar acts.


Under the law, punitive damages in a wrongful death lawsuit are taxable income.


Suppose a plaintiff receives a wrongful death lawsuit settlement of $10 million, which includes $6 million in punitive damages and $4 million in compensatory damages. In this case, they will have to pay taxes on the $6 million, while there will be no taxes applicable on the remaining amount.


Emotional Distress Awards

Whether or not emotional distress awards in wrongful death lawsuit settlements are taxable depends on the circumstances of the case.


In wrongful death claims involving emotional distress arising from the personal injury or illness of a loved one, the claimant does not have to pay taxes on that amount.


However, if the emotional distress has nothing to do with the claimant's personal injury or illness, the amount might be taxable. Each wrongful death case is unique, and an experienced attorney can help assess the facts before guiding the affected party.


Accrued Interest

In some wrongful death cases, the settlement amount may include accrued interest, which could add up over time. This typically happens when the defendant files an appeal for the case, and the plaintiff has to wait until the higher court decides the verdict.


The law treats accrued interest as taxable income, and the claimants must pay taxes on it. Experienced fatal injury attorneys can guide the affected party on how this can impact their case.


Medical Costs Deducted Previously

When the claimant has already deducted the medical costs from their income tax in the previous year, it means that they've already claimed a deduction on their taxes.


If they receive the wrongful death settlement, they must pay taxes on the medical expenses portion of it.


Does the Affected Party Have to Fill 1099 Form for a Wrongful Death Lawsuit Settlement?


The 1099 form is for all those claimants or plaintiffs who receive a wrongful death settlement from the court or through an insurance company that includes taxable compensation.


If the court awards punitive damages, for example, the affected party must fill out and file a 1099 form.


It's crucial to understand that avoiding taxes or understating income can have serious legal and financial repercussions for the claimant. They must seek professional advice if they're unsure how much their taxable compensation from the wrongful death settlement is.


Is There a Way to Minimize Tax Liability in a Wrongful Death Lawsuit?


The strategy that a plaintiff can use to minimize their tax liability depends on the facts surrounding the case. An experienced wrongful death attorney can request the court to spread the payments over a certain period of time.


Spreading the compensation award over a couple of months or years ensures that the payments do not fall in a higher tax bracket and the affected party can receive a stable income for a certain period.


How Can an Experienced Wrongful Death Attorney Help the Affected Parties Get Justice?

How Can an Experienced Wrongful Death Attorney Help the Affected Parties Get Justice?


Schuerger Shunnarah Trial Attorneys have decades of combined experience handling wrongful death cases in Houston, Texas. They help their clients in many ways, including the following:

  • Investigate the incident and gather the necessary evidence

  • Build a strong wrongful death claim

  • Handle the insurance company

  • Negotiate a fair settlement or go to trial

  • Represent the client in court

Besides assisting with the legal process, Schuerger Shunnarah Trial Attorneys have deep knowledge of the tax implications of wrongful death settlements. They can work with the insurance company or judge to create a structure that reduces the affected party's tax liability.


Schuerger Shunnarah Trial Attorneys Can Help Structure the Settlement to Minimize Tax Liability!


Those who have lost their loved one due to someone else's negligence in Houston, Texas, should call to schedule a free consultation with Schuerger Shunnarah Trial Attorneys. They can help assess the facts surrounding the wrongful death case and guide the affected party on how they can minimize their tax liability.

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