Casey is a founding partner at River Run Law Group. Casey has tried numerous cases across the Commonwealth in both General District Court and Circuit Court. He has earned millions of dollars for his clients through trials, mediations, and settlements.
Wrongful death settlements provide an imperfect but valuable way for grieving family members to find closure and rebuild after the loss of a loved one. However, after the relief of reaching a settlement, many families find themselves facing unexpected questions about their next steps.
Common questions include: Is a wrongful death settlement taxable? Although studying tax law is likely the last thing you want to do during this time, understanding the broader financial implications of a wrongful death settlement is crucial to avoid potential legal issues.
In this article, we’ll break down the basics of the taxability of wrongful death settlements in Virginia, what types of compensation are tax-exempt, and when you may need to report settlements to the IRS.
Is a Settlement in a Wrongful Death Claim Taxable?
The good news for grieving families is that most wrongful death settlements in Virginia are generally not taxable.
Under US tax law, the legal compensation someone receives for physical injuries or illness is not considered income for tax purposes. Wrongful death settlements typically fall under this category of compensation.
Since a wrongful death settlement addresses the tangible and intangible losses resulting from the death of a loved one, much of what it includes is exempt from taxation.
However, there are some exceptions. Let’s walk through the typical parts of a wrongful death settlement and how the IRS treats each part.
What Parts of a Wrongful Death Settlement Are Tax Exempt?
The following are common categories of compensation in a wrongful death settlement that are not considered taxable income.
Medical Bills
Reimbursement for the cost of your late loved one’s medical treatment is often a major part of a wrongful death settlement. Compensation may cover past expenses and any outstanding bills for care your beloved received before their death. This often includes hospital bills, emergency care, surgery, prescriptions, and medical equipment.
Lost Income
Lost financial support due to the unexpected passing is another significant part of wrongful death compensation.
In many cases, losing a loved one means the loss of years of future earnings, employment benefits, and other forms of financial support they provide to the family. The compensation for all forms of lost income family members may recover in a wrongful death settlement is not taxable income.
Burial and Funeral Expenses
The cost of honoring your late family member is also often included in a wrongful death settlement. Because these are necessary expenses that result from your loved one’s passing due to an injury, compensation for these expenses is exempt from taxation.
When Is a Wrongful Death Settlement Taxable?
While most wrongful death settlements are tax-free, there are circumstances where portions of a settlement could be subject to taxation. Let’s look at some specific situations families should be aware of.
Punitive Damages
Punitive damages are a form of compensation designed to punish the responsible party for particularly serious or extreme negligence.
Although it is rare for a judge to grant punitive damages in Virginia wrongful death claims, it happens occasionally. However, since the purpose of these damages is to punish rather than to compensate for losses—they are subject to federal and state income taxes.
Interest on the Settlement
Sometimes, interest may accrue on a wrongful death settlement if payment is delayed. The accrued interest is taxable income, which you must report on your tax return.
Noneconomic Damages Absent Physical Harm
Wrongful death settlements frequently include compensation for the intangible or emotional toll a death has on family members, e.g., emotional distress, mental anguish, and loss of companionship. However, these damages are generally considered taxable.
According to the IRS, compensation for noneconomic damages like emotional distress is only tax-exempt when linked to the personal physical injuries or sickness experienced by the person receiving the award.
In a wrongful death claim, the family members get compensated for their emotional distress over the physical injuries or sickness of someone else (i.e., their lost loved one), not themselves. Therefore, this portion of damages is taxable.
Notably, things may work differently for families who file a survival action instead of a wrongful death claim. In a survival action claim, the decedent’s estate takes legal action for an injury suffered before their passing.
Legally, a survival action continues a claim the decedent could have pursued if they’d lived. Therefore, any noneconomic damages awarded are not taxed since they result from the harm the decedent suffered before they passed.
What Happens If I Don’t Pay Taxes on a Settlement?
Failing to properly report taxable portions of a wrongful death settlement can lead to serious consequences. These could include:
- Penalties—the IRS can impose monetary penalties and interest on unpaid taxes;
- Audits—incorrectly categorizing or ignoring taxable damages could trigger an audit, leading to further scrutiny of your financial records; and
- Legal consequences—in extreme cases, failure to report taxable income could result in legal action by the IRS or Virginia’s Department of Taxation.
To avoid these outcomes, working with an attorney and a tax professional familiar with the nuances of wrongful death settlements is essential. They can help ensure you comply with all applicable tax laws while protecting your financial interests.
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Experienced Virginia Wrongful Death Attorneys – Call for a 100% Free Consultation
Navigating the legal and financial complexities of a wrongful death claim can feel like an immense burden after the emotional devastation of a loss.
At River Run Law, our Virginia wrongful death attorneys are here to support you with compassionate, knowledgeable representation every step of the way. We understand your challenges and are committed to helping you secure the compensation your family needs.
Our experienced advocates can provide insight and guidance when structuring the settlement, helping you avoid any surprises. With decades of combined experience in Virginia law and a passionately client-centered approach, our team is dedicated to providing the empathetic, personalized guidance your family deserves.
If you have questions about wrongful death settlements or are considering legal action on behalf of a loved one, contact River Run Law today for a free consultation.
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