Settlements for wrongful death are tax-free. Although IRS Publication 4345 does not go into a lot of detail, wrongful death claims fall into the category of compensation for physical injuries. Compensatory damages awarded for wrongful death are always income-tax exempt to the survivors. Although punitive damages are usually taxable, depending on the state law, they may be exempt from income in a wrongful death claim. A wrongful death claim is considered property of the decedent's estate and would be includable for estate tax purposes. However, due to the federal exemption for estate taxes, unless the estate had substantial other assets, this should not be an issue for the following reasons. For decedents dying in 2002 and 2003 the value of exempt assets was $1 million, for 2004 and 2005 the exemption was $1.5 million, in 2006 through 2008 the exemption was $2 million and for 2009 the exemption was $3.5 million. As long as the total value of the decedent's estate, including the settlement, was below the threshold applicable to his year of death, the estate tax would not be an issue. Note, in 2010, currently, there is no federal estate tax.
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