We received money for a wrongful death lawsuit that was settled out of court, Is this taxable?

[moe0205]

Father started the lawsuit before his death, the lawsuit was settled out of court, The Children became the Beneficiary of the lawsuit and were awarded settlement funds. Is this taxable?  

[Critter]

Most likely yes ... did you get a 1099-misc for the distribution yet ?   Have you talked to the attorney about this ?  

[moe0205]

We just got the money last week so no the 1099 . We will Get a answer from the attorney. Thanks

[Anonymous · Accepted solution]

IRS Regulations

According to the IRS, any lawsuit settlement proceeds that a court awards for physical illness or injury are non-taxable. This includes wrongful death settlements, since the damages are imposed due to a court’s finding that a third party is responsible for the physical illness or injury that resulted in death. To qualify for this exception, the settlement must be compensatory, meaning that it must be a form of compensation for the pain and suffering caused in the case.

Since compensatory proceeds are non-taxable, they have no impact on a federal tax return. However, if there are any additional proceeds that are awarded such as punitive damages, payments for emotional distress, or awards for lost wages, those payments are considered income and are subject to income tax. Punitive damages are additional financial awards that a court may give to the family of a deceased or injured person in cases where the company or individual responsible for the death showed gross neglect or disregard.

[sdnelson]

I’d be curious to know what you found out from your attorney. I’m in the very same situation and I’m getting conflicting opinions. From everything I’ve read and from what I see in IRS article 104 (2) (a), it seems that wrongful death awards settled out of court are compensatory damages and not punitive. Therefore they are not subject to taxes and can’t be considered as part of your income. I don’t believe you should receive a 1099. If you don’t mind would you share what your attorney told you? 

[sdnelson]

I don’t think you are correct on this. I believe these would be considered compensatory and not subject to taxes. Now, if a judge or jury awarded punitive damages then that is a different story and definitely taxable.