Many injured victims in California, who have suffered the calamity of losing a grandfather, child, husband or wife due the negligence of another, are typically wrongful death victims who will be forced to sue to recover a money judgment, or settlement so they can continue living now that a wage earner is in the grave. If awards are received in a case of wrongful death, and hundreds of thousands of dollars are owed for the person’s hospital and nursing home expenses, for example, can the award amounts be taxed? What about punitive damages? Are they potentially taxable?
Caveat - Always Speak to a Tax Attorney Before Committing to a Settlement
At the outset, we are not tax attorneys. We are merely citing the IRS code and dissecting what it says. Other parts of a judgment besides actual loss, or personal injury loss, such as punitive damages, could potentially be taxable. It is important to not only consult an experienced attorney, but a tax return preparer should also be contacted to ultimately settle and structure estate matters such as this.
The law is clear, physical personal injuries and wrongful death awards are excluded from income that is being taxable. As per Internal Revenue Code Section 104(a)(2), punitive damages are considered to be income that is taxable. However, the damages may be excluded (§ 104(c)) if an award is only received for punitive damages under a state’s statutes for wrongful death in effect on or prior to September 13, 1995. The Conference Committee is cited by the CCH Federal Tax Service to report to P.L, 104-188 (1996) H,R. Rep. No. 104-737 concluding that damages received for cases of wrongful death that are non-punitive are excludable income under Section 104 of the Internal Revenue Code.
The descriptive language under Letter Ruling 200029020 and § 104(c) is also in support of this decision.(Revenue Rulings 69-8, 54-19, 75-127, 75-126, 83-44.) Damage amounts that are awarded under a statute of wrongful death may be excluded from the deceased person’s taxable estate. However, amounts the deceased may have been eligible for pain and suffering during their lifetime or as medical expense refunds, etc. are includable in the taxable estate. As you can see, there is a distinction between the survivor and the estate, when it comes to the decedent’s pain and suffering. Your own pain and suffering or medical bills are going to be excludable as taxable, but the decedent’s refunds, and their own pain and suffering would appear to be taxable. IRS Circular 230 Disclosure: As under U.S. Laws, the reader and viewer of this material is advised that any written tax advice, perceived or otherwise, contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code. If you wish to learn more about tort claims involving death, contact Michael Ehine death attorney Los Angeles at 201 Wilshire Blvd. #2 Santa Monica, CA 90401. 310-376-8488. Other Sources: http://www.taxtrimmers.com/taxfaq/death.shtml