Wrongful Death Compensation: Payment Options and Taxes
Wrongful death court proceedings and settlement processes can be very overwhelming for the families of the decedent. While still grieving, survivors have to manage continuing legal issues and possible medical bills resulting from their loved one’s death. While waiting for compensation, plaintiffs might have questions about how they will receive payments and if the IRS might require the income on their tax return. What should you expect if you receive a substantial amount of money for wrongful death?
Wrongful Death Payout Options
In wrongful death and other personal injury cases, plaintiffs are usually given two options for how they receive their payments. They can choose to have all the compensation given to them in one lump sum or they can have the compensation divided into regular deposits distributed over a period of time, which is known as a structured settlement. Since there are pros and cons for each type of distribution, it might be helpful to determine which type is best based on your personal circumstances.
Pros
Lump-sum – you have full control over the payment; easier to pay off larger medical expenses and get out of debt
Structured settlement – a fixed, dependable stream of income that can help with ongoing bills
Cons
Lump-sum – you need to manage your savings and spending carefully.
Structured settlement – no flexibility; can’t adjust payments based on your future needs.
You should check with your wrongful death lawyer,to find out if your state has any requirements regarding wrongful death or personal injury compensation. He or she can also help you determine which payment option is best for your situation.
Wrongful Death Payouts and Taxes
If you are the recipient of wrongful death compensation, you will not need to include it in your taxable income. The IRS stipulates that settlements and court-mandated compensation from personal injury and illness, including wrongful death claims, are non-taxable. However, the court could impose punitive damages for the defendant, which would be paid to you. In these situations, you will have to report those additional payments as “other income” on line 21 of the 1040 form. Punitive damages are fines imposed for emotional pain or lost income, and are considered extra punishment for the defendant.
Since wrongful death laws vary greatly state-to-state, it is highly recommended that you consult with an attorney experienced in wrongful death settlements and trials in your area. You might also want to consult with a tax attorney or accountant if your compensation might be a large amount. These professionals will help you prepare to manage your affairs during this difficult time.