Are Proceeds From a Wrongful Death Lawsuit Taxable Under California Law?

The vast majority of compensation that you will come across in civil injury cases is not taxable. This includes damages received for personal injuries, wrongful death, healthcare bills, mental suffering, and lost wages. What is taxable? Here are some things that the government can touch:

• Punitive damages
• Interest payments
• Trademark infringement
• Other non-injury amounts.

Note, the demarcation between tax liability lies more on the nature of the injury and less on type of case.

You might wonder why the Internal Revenue Service (IRS) taxes things like punitive damages, interest payments, and other kinds of compensation but does not tax for personal injuries, wrongful deaths, suffering, wages, etc. The logic here is that the IRS sees the latter category as payments for physical injuries or illnesses and not payments for business loss, court retribution, financial accumulation, or any other thing. However, the IRS will strictly review amounts for physical injury or illness and see if they are compensatory in nature. If they are not, or if they go beyond what the injury or illness is, then they can be taxed. This rationale makes sense when you think about the fact that courts are supposed to make a victim whole again. It would go against that mission to tax the jury awards or settlement amounts that are meant to do just that!

While knowing about all of this tax policy might be useful, you are probably wondering how it affects you at tax time and what you must do when filling out your tax returns. For the items that compensate you for bodily injury (like for personal injuries, wrongful deaths, mental anguish, hospital bills, lost wages, etc.) you don’t have to report them at all. The IRS does not recognize this income at all. However, for the amounts that compensate you for things beyond personal injury (like business loss, interest, punitive damages, etc.), the IRS does recognize this as income. Therefore, you must list it on your 1040 or other tax return. How much taxes you will pay on it depends on your other income amounts, deductions, family status, and a variety of factors. But it is important to realize the practical difference between these two categories of legal compensation.

As you can imagine, it might get tricky determining what is and what is not taxable after receiving compensation for a California wrongful death case. Not only do you have to consult California laws but you have to reference and understand IRS rules. The penalties can be significant if you fail to acknowledge and abide by them. Failure to pay required taxes can result in financial penalties and even jail time. Therefore, it is essential that you consult tax law and speak with an attorney after receiving a wrongful death award.

After learning about the obligations and responsibilities you have following a California wrongful death case, you might be wondering what it’s worth? While it is hard to give an exact number, it is easy to point to areas of compensation where you might find recovery. For instance, identify the expenses that the death caused you and then consider how the loss will leave you intangibly changed going forward. These kinds of economic and non-economic injuries are normally where plaintiffs recover the most. Once you’re done estimating these figures you’ll have a better understanding of what you can obtain in a California wrongful death case.