Paying taxes is as American as apple pie. Taxes are commonly paid on wages earned from work or when shopping. They can even get deducted from legal settlements won in court.
Interestingly, not all legal payments are created the same. That means you may not owe taxes depending on the type of personal injury lawsuit won.
Tax law can be puzzling whatever the situation. So, let’s zero in on wrongful death settlements and how you could or could not be responsible for paying taxes on them.
Will the IRS tax a wrongful death settlement?
The answer to this question comes in two parts.
- Compensatory damages in wrongful death lawsuits are not taxable by the IRS because the IRS does not deem them a source of income. A wrongful death settlement results in a plaintiff receiving these damages for lost wages, property damage, medical bills, medicine, pain and suffering, etc.
- The IRS does, however, consider punitive damages taxable income. This is because the court does not award punitive damages to compensate for economical or emotional loss. Instead, the court grants punitive awards to discourage further acts of negligence like the actions that led to the lawsuit. They are meant to punish the individual that caused your loved one’s death.
However, IRS regulations for punitive damages are not as cut-and-dry in Alabama.
Punitive damages in Alabama
Alabama only allows punitive damages for wrongful death; it does not permit compensatory damages for wrongful death. Because of this, the IRS provides an exemption from taxation on punitive damages in Alabama.
This means you do not pay taxes on wrongful death settlements in the state. It is important to note that punitive damages don’t consider lost income and medical bills. The seriousness of the defendant’s negligence determines the possible settlement amount.
Typically, Alabama places a $1.5 million cap on punitive damages, but the limit does not apply in wrongful death cases.
Attorneys evaluate various factors to calculate a wrongful death lawsuit’s settlement value. These factors include the circumstances of your loved one’s death, the level of negligence displayed by the defendant, and insurance coverage.
Navigating legal cases can be overwhelming, but the skilled and experienced attorneys at Timberlake & League will help you along the way. Call us to schedule a free consultation.