If you have recently been awarded a wrongful death settlement in Florida or are in the process of filing a lawsuit, then you’ll want to know if your financial compensation will be taxable. In general, the IRS has ruled that compensatory damages are not typically taxable. This is due to their nature of being intended to provide compensation for the beneficiaries of the suit for their loss. However, there are situations where the settlement funds are taxable. This applies to cases that have been filed and compensation awarded in the West Palm Beach area as well as the rest of Florida.
Determining the Type of Damages
There are two factors that will determine if the amount owed is subject to being taxed. The IRS makes a distinction between compensatory damages and punitive damages. Whether or not your settlement is taxable is contingent on how it is categorized.
- Compensatory damages: Compensatory damages are the funds awarded to the victim’s beneficiary to compensate for funeral and burial costs, medical bills, and expenses that were incurred as a result of the death. Compensatory damages may include lost income and future income estimates as well. This calculation is based on the age of the victim, their average life expectancy, and the earning potential of the victim for the anticipated remaining years in the workplace. Factors such as the loss of companionship and non-economic household contributions may be included with compensatory damages.
- Punitive damages: Punitive damages may be awarded in addition to compensatory damages. Punitive damages will not be awarded in every case. This type of financial award is intended to discipline the defendant and dissuade them from committing similar future acts. Punitive damages are awarded when the court determines that the defendant’s intentional, negligent, or reckless actions were the cause of the victim’s death. Often, this occurs when the actions of the defendant were particularly outrageous.
The IRS does not require taxes to be taken out of compensatory damages awarded in personal injury settlements or judgments awards. Wrongful death suits are included in this statement.
However, the IRS sees punitive damages differently. Punitive damages are acting as a punishment so the IRS will charge taxes on these awards. In the agreement, the funds may not be referred to as punitive damages, but instead called exemplary damages. Whether your settlement refers to these funds as exemplary or punitive, you should be aware that it will count as income on your tax return and you must pay the applicable taxes.
There are some exceptions to these general rules. Portions of compensatory damages may be considered taxable if you had taken deductions from your income in previous years to pay medical bills related to the event that resulted in the death of your loved one. If you are awarded a financial settlement, then you must report a portion of your award that is equal to the amount you claimed as a medical deduction in the past. Punitive damages are also subject to exceptions and may be considered non-taxable in certain cases. However, it’s best to consult with a wrongful death lawyer or tax professional as the rules can be complicated regarding whether or not you qualify for an exemption.
For more information, speak to one of our wrongful death attorneys today.