As per IRS Rule 1.104-1, the amount received in a wrongful death settlement claim remains exempt from taxation. Nursing home abuse is regrettably prevalent throughout the United States, and Arizona is no exception. An unfortunate consequence of nursing home abuse can be wrongful death. While a settlement can never fully alleviate the pain of losing a loved one, it may help alleviate some financial burdens. If you find yourself in this situation, you might be wondering, “Is a wrongful death settlement taxable?”
The injury attorneys at Phoenix Accident and Injury Law Firm, located near you, have significant experience in assisting clients whose loved ones have been victims of wrongful death. Our offices are conveniently located in nearby Chandler, Peoria, and North Phoenix, and we offer consultations in-person at our offices, over the phone, or via video call. Feel free to contact us for a free consultation, or continue reading for more information.
Moreover, we can assist you with other issues that may have been causing you distress, such as finding nearby medical professionals or recommending temporary or long-term care options. Your safety and the well-being of your family are our top priorities, and even the most skilled legal team cannot truly help if your quality of life is compromised while seeking justice and compensation. Ultimately, our goal is to restore your quality of life, providing both long-term legal support and immediate assistance as needed. With our extensive knowledge of the local Phoenix courts, we are confident in our ability to secure the best possible settlement for you.
When considering a wrongful death settlement in Arizona, you may face numerous questions, including concerns about your personal financial situation. You may inquire about matters such as, “Is a wrongful death settlement taxable?”, “How does a wrongful death settlement work?”, “What damages are awarded in a wrongful death suit?”, and “Are income taxes paid on wrongful death settlements?”
This guide aims to assist you in navigating the complexities of bringing a wrongful death claim and understanding the tax implications associated with this legal process.
What are Wrongful Death Settlement Taxes?
When an individual’s death is determined to have been preventable due to the negligence of a person or organization responsible for their care, it constitutes a wrongful death.
In such instances, the deceased’s family can initiate a legal case, and a settlement for damages is typically awarded by the insurance company representing the responsible party or organization.
As a result, the damages awarded are often significant but may be capped by the maximum limits outlined in the insurance policy.
For further insights into how wrongful death lawsuits operate, you can explore our Wrongful Death FAQs article.
What constitutes Recoverable Damages?
The primary objective of a wrongful death claim is to seek compensation, aiming to address the financial and emotional impact resulting from the loss of a loved one.
As such, there are two primary types of recoverable damages typically sought in a wrongful death case:
- Financial damages: These are tangible and quantifiable losses, including expenses such as funeral or burial costs, medical bills, and property damage. These damages are usually claimed on behalf of the deceased person’s estate.
- General damages: These encompass more subjective losses, such as pain and suffering endured by the family members of the deceased, as well as potential loss of companionship, particularly if the claimant is the spouse or child of the deceased. These damages are typically awarded directly to the family members acting as plaintiffs in the case.
It’s important to note that any income taxes owed on the settlement amounts will need to be addressed at this stage.
How Damages Are Distributed
When a settlement is disbursed to the deceased, it remains subject to any outstanding liabilities and debts owed by the deceased. In such instances, the settlement is treated as an asset to settle any remaining obligations to creditors. If there are no creditors to be paid, the remaining finances and assets are distributed among the beneficiaries.
Typically, damages awarded to the deceased’s family members are then divided among them.
However, in cases where disagreements or disputes arise among family members, it is possible to petition the court to establish a distribution order. It’s essential to understand that this court order is legally binding. The court will determine the distribution based on the proportion of the claim entitled to each eligible family member.
Tax Implications of Settlement Payments
Most legal settlements are typically treated as income by the law, making them subject to income taxes for the recipient. However, exemptions exist for certain settlements, such as those involving personal injury or wrongful death. These settlements are considered exempt from income taxes, meaning you won’t be required to pay income taxes on your wrongful death settlement.
Settlement Taxes in General
Taxation of settlements can be intricate. In general, whether income taxes apply depends on the purpose of the settlement.
Compensation for physical injury in civil damages is typically exempt from income taxes. However, punitive damages, emotional damages, and interest may be subject to income taxes.
When a settlement encompasses both physical and emotional damages, they are non-taxable if the intent of the settlement is to compensate for bodily injury, as in a personal injury case. Personal injury settlements are IRS-exempt from income taxes.
Even if your personal injury settlement includes a pain and suffering award, the entire settlement is typically not taxable.
Wrongful Death Settlement Taxes
In most cases, wrongful death settlements are treated similarly to personal injury settlements concerning income taxes.
Wrongful death claims also enjoy an exemption regarding the taxation of punitive damages.
According to I.R.C. § 104(c), income taxes do not apply to punitive damages awarded in a wrongful death action.
Therefore, if punitive damages are part of a wrongful death civil action, they are not considered taxable income.
The IRS explicitly states that settlements for personal physical injuries or sickness, without prior itemized deductions for related medical expenses, are entirely non-taxable.
The purpose of a wrongful death settlement, legally, is to provide compensation for wrongdoing.
However, there are some exceptions to consider:
If the settlement surpasses the inheritance tax threshold.
When the settlement amount exceeds the federal threshold for tax exemption, currently set at $11.58 million in 2020, it may trigger estate taxes. It’s crucial to be mindful of both state and federal laws when considering taxes.
In cases where no estate tax is imposed by the state, only federal taxes are applicable. Given that Arizona doesn’t have an estate tax, individuals dealing with estates within Arizona’s jurisdiction would primarily need to address federal estate tax limits.
If medical expenses were claimed as tax deductions on a previous year’s income taxes
In cases where deductions were previously claimed for specific medical expenses, the IRS stipulates:
“If you receive a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit. If part of the proceeds is for medical expenses you paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical expenses to each of the years you paid medical expenses.”
To address this matter correctly, you’ll need access to the decedent’s past tax returns to calculate the total deductions for medical expenses and any tax advantages gained from these deductions.
Comprehending Your Income Tax Obligation: Taxes on Wrongful Death Settlements
Tax laws can be quite complex, making it wise to consult with an experienced Arizona attorney specializing in wrongful death settlements.
It’s advisable to seek legal representation as early as possible, as a knowledgeable attorney can differentiate actions that may incur separate taxable consequences from those that won’t. This distinction can simplify your tax filing process when you prepare your income taxes.
Additionally, an Arizona wrongful death attorney can evaluate your specific circumstances, assist you in securing a fair settlement, and offer qualified tax guidance as you navigate this challenging situation.
They can provide clarity on your tax obligations, ensuring that if taxes are owed on your settlement, you can address them without adversely affecting your personal finances.
FAQs on Taxes Related to Wrongful Death Settlements
Which state’s tax laws apply if my mother’s death occurred in another state?
The tax laws of the state where your mother lived will apply. States like Washington, Oregon, Minnesota, Illinois, New York, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, and the District of Columbia have specific tax laws. Each state has its tax limits, dictating whether the settlement will be taxed and at what rate. Federal tax law exemptions apply in states without specific tax laws.
How much time do I have to file taxes for a nursing home abuse wrongful death settlement?
According to A.R.S. § 12-542, you have two years from the date of death to file a civil suit for wrongful death. Seeking legal counsel early is advisable, as experienced attorneys can help you navigate the legal process effectively and maximize your settlement.
I’m unsure if I can handle a court battle emotionally. How can I avoid wrongful death settlement taxes?
Pursuing a case in court can be overwhelming, especially after the loss of a loved one. However, many cases are settled outside of court if the at-fault party’s insurance company admits fault. To negotiate a settlement without going to court, you’ll need to determine the value of your claim, gather evidence, and potentially consult with an attorney for negotiation assistance.
Can I pursue some damages now and some later to avoid exceeding the exemption limit?
Once a settlement is reached, it is binding, and there is no legal way to avoid paying estate taxes if owed. Signing a settlement agreement releases the at-fault party from future liability for the wrongful death. Subsequently, you cannot pursue additional damages for the same case later.
Seek Assistance Now with Your Wrongful Death Settlement Taxes
Our team of wrongful death settlement tax attorneys is committed to advocating for family members who have suffered abuse and assisting them in securing improved accommodations in the local vicinity. With prior experience handling numerous nursing home abuse cases in your region, we take the time to comprehend the family’s concerns and the circumstances they believe their loved one is facing.
At Phoenix Accident and Injury Law Firm, conveniently located near you, we boast over 15 years of experience aiding clients in obtaining compensation for their personal injuries, including those related to wrongful death settlement taxes in the Phoenix area. When you’re prepared to discuss your situation, please reach out to our office to schedule a complimentary initial consultation, either by phone or at our Chandler office, which is conveniently situated nearby.
If you or someone you care about has fallen victim to wrongful death settlement taxes, contact Phoenix Accident and Injury Law Firm in Chandler, AZ, to speak with a seasoned personal injury attorney. We offer legal services for personal injury cases to clients in your vicinity, including Chandler, Gilbert, Mesa, Scottsdale, Tempe, and Peoria.
