Hello, I'm Karla Mitchell. Going through a legal case can be very expensive and challenging. I won't go into details, but I recently underwent my own legal battle that lasted several years. It is finally over and I successfully received a settlement, but I had to spend so much time studying law in order to play my role in my own court case. While I found a great attorney at one point, I felt completely lost initially and I don't want anyone else to experience the same thing. So I decided to create this blog for those who would like to know more about law.
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Here's a shocking fact: nearly 121,000 individuals are victims of wrongful death accidents each year according to the U.S. Centers for Disease Control and Prevention. Losing a loved one in a wrongful death accident can result financial hardship – not to mention emotional distress. Filing a wrongful death lawsuit may help you recover monetary compensation to deal with tough times; however, the compensation that you receive may be taxable. Here are the tax implications that you need to be wary of.
Compensatory Damages
Compensatory damages are for both economic and non-economic losses. Economic losses include funeral costs, any medical costs that may have incurred prior to the death, or financial hardship that the death may have caused the family. Basically, compensation for anything that has an actual monetary value to it falls under economic losses. On the other hand, losses that do not have an exact monetary value fall under non-economic losses. For example, non-economic losses involve compensation for pain and suffering, emotional distress, or loss of consortium.
Compensation that is paid towards economic losses is non-taxable. However, if the compensation is solely for compensating non-economic losses, it is taxable. If the compensation amount is for both economic and non-economic losses, you do not need to pay any taxes, as long as a portion of the compensation goes towards economic losses. Your wrongful death attorney will request that the court specify that a portion of any compensation that you receive is going towards economic losses
Punitive Damages
Punitive damages, on the other hand, are intended to punish the wrongdoer for the accident that has happened. The court will generally award punitive damages if the circumstances involved with the wrongful death are particularly outrageous. For example, a deliberate or irresponsible action may have contributed to the wrongful death.
The Internal Revenue Service (IRS) considers compensation for punitive damages to be income. As a result, compensation for punitive damages is taxable, and you must declare it as income. To reduce the amount that is taxed, an experienced wrongful death attorney will request that the court specify in writing the amount that is specifically awarded as compensation for punitive damages. This will allow you to only report a portion of your settlement as income, as compensation for compensatory damages can be excluded.
In some states, punitive damages may not be taxable if only punitive damages were awarded for the wrongful death. This means that you did not recover any compensation for compensatory damages.
Exceptions to Keep In Mind
There are other exceptions that you have to keep in mind. If you deducted medical bills or other expenses from your income as a result of the wrongful death in previous years, the amount that you previously deducted must be reclaimed as income once the case is settled and compensation has been awarded.
Each state also possesses unique tax laws that affect whether the compensation may be taxable. For example, in some states, inheritances are added to the value of your estate. You will need to pay estate taxes if the value of your estate and the inheritance exceeds the Federal Estate Tax Exemption. In 2013, the Federal Estate Tax Exemption was $5.25 million, with the tax rate for any excess being 40%.
Conclusion
An experienced wrongful death attorney will not only help you obtain the compensation that you rightfully deserve, but will also be able to provide you with some information regarding tax implications that you need to be aware of. They will also ensure that the settlement clearly states how the compensation amount was calculated, so that you will not be subjected to having to pay more taxes than absolutely necessary. This will allow you to make the most out of the settlement to recover from such a tragic and traumatic incident without having to experience any additional financial hardships.
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