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Timberlake & League

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Are Wrongful Death Settlements Taxable?

March 7, 2022 by Timberlake & League, P.C.

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.

  1. 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. 
  2. 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.

a man who received a wrongful death settlement working on taxes

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. 

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Category iconPersonal Injury Tag iconWrongful Death

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Although we handle cases throughout Alabama, Tennessee, and Georgia, our primary practice areas are in North Alabama and Southern Tennessee. We serve the following localities: Colbert County including Tuscumbia and Muscle Shoals; DeKalb County including Fort Payne; Etowah County including Gadsden; Jackson County including Scottsboro; Lauderdale County including Florence; Lawrence County including Moulton; Limestone County including Athens; Madison County including Huntsville and Madison; Marshall County including Albertville, Boaz, and Guntersville; and Morgan County including Decatur and Hartselle. In Tennessee we serve Giles County including Pulaski; Lawrence County including Lawrenceburg; Lincoln County including Fayetteville; and Franklin County including Winchester.

No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers.