Do you pay income taxes on a wrongful death settlement?
I have read numerous answers on this. The IRS rules seem very vague. The answer seems to depend on the claims which can be divided into 3 categories (1. Injury 2. loss income 3. Punitive). For Injury it seems that this is not taxable. For loss of income or services this might be taxed as had the person lived these things would be taxed. Punitive claims are certainly taxed. The big problem is that most settlements don't go into detail about what the settlement covers. Any attorney worth his salt would write out a settlement that would cover any and all claims and not go into detail about how each portion of the settlement is going to a specific claim. Maybe I am misunderstanding this thing completely. My father income was from disability insurance which was not taxed.
Estate Planning Attorney
The taxation of settlements is governed by the origin of the claim. If claim by its usual nature is taxable income, then the settlement (or the portion that relates to the taxable income) is itself taxable. A settlement can allocate the proceeds to a specific claim or claims. I am sure that if you can settle on a non-taxable claim, you may settle for a lesser amount that if it was taxable. This needs to be specified in the settlement agreement. If the settlement agreement does not allocate the proceeds among the claims, then you should ask your attorney to allocate it in writing for you based on the underlying facts and claims. Notwithstanding any of the foregoing, the IRS could challenge the allocation of the settlement proceeds, and seek to tax some or all of the settlement proceeds. It all depends on the facts underlying the claims.
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