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By John Kristensen of Kristensen, LLP posted in Wrongful Death on Thursday, May 24, 2018.
Wrongful Death Settlements And Taxes: What Is Tax Exempt What Is Not?

It seems as if just about anything is subject to taxes nowadays, which is why many people tend to believe that wrongful death settlements are taxable as well. But that is not entirely true, and our Los Angeles wrongful death attorney is going to explain why.

Although there are some insignificant exceptions to the general rule, heirs of family members who died as a result of someone else’s negligence, recklessness, breach of contract or omission to act will not have to pay taxes on the wrongful death settlement proceeds.

Wrongful death settlements usually compensate certain surviving family members – eligible heirs of the deceased – for both economic and non-economic damages and losses.

Are wrongful death settlements taxable or not?

In Los Angeles and elsewhere in California, people have to pay income taxes on “earnings.” And while many tend to believe that wrongful death settlements count as “earnings,” too, it is not that simple. Generally, “earnings” is the term defined as any money received in exchange for effort.

Although filing a claim or lawsuit can be categorized as “earnings” under that definition, Congress has decided to exempt victims and their relatives from having to pay taxes on compensation received for physical injuries or emotional injuries caused by a physical injury.

And here is where it gets tricky. What about wrongful death settlements? When an eligible heir of the deceased makes a wrongful death claim, he or she does not personally suffer a physical injury, so what gives? “That is why Congress also included tax exemptions for those who receive financial compensation for a relative’s death if the death was caused by physical injury,” explains our Los Angeles wrongful death lawyer at the Kristensen LLP.

Compensation for emotional injuries may be subject to taxes

Financial compensation for emotional injuries, on the other hand, may be subject to taxes but only when that emotional harm was caused by something unrelated to physical injuries. For example, a person receiving compensation for emotional distress caused by sexual harassment in the workplace will have to pay taxes on his/her settlement or verdict.

The tax exemption also extends to wrongful death cases caused by “physical illness,” meaning that an eligible heir of a deceased relative whose medical condition kept getting worse due to someone else’s negligence would not have to pay taxes on a settlement. The same goes for wrongful death cases arising from medical malpractice. If a doctor failed to diagnose a certain medical condition and the person dies from the undiagnosed disease, his/her heirs will not have to pay taxes on the settlement or verdict proceeds.

What is exempt from taxation in wrongful death settlements?

Interestingly, you would also be exempt from taxation when recovering compensation for emotional injuries caused by a wrongful death of a loved one. For example, the loss of training and guidance, the loss of love and affection, and the loss of sexual relations are all tax exempt if they were caused by a wrongful death of a loved one who sustained physical injuries.

Also, wrongful death compensation for the loss of financial contributions, including but not limited to gifts and services that the deceased would have provided if he or she did not die, are also not subject to taxes. Punitive damages, which courts in Los Angeles and all across California award to punish illegal and reckless conduct, are NOT exempt from taxation.

Consult with our Los Angeles wrongful death attorney to determine the value of your wrongful death claim and find out what will and will not be subject to taxes in your particular case. Contact our lawyers at the Kristensen LLP to get a free consultation. Call at 310-984-1297 or fill out this contact form.