Texas law allows for anyone who suffered the loss of a loved one to pursue a wrongful death case.
Through a Texas wrongful death lawsuit, surviving loved ones can obtain monetary compensation for the losses they endured as a result of the negligent party’s actions.
A wrongful death award can easily reach the six and seven-figure range. This may lead many families to wonder, Are wrongful death settlements taxable?
Generally, damages collected through a wrongful death lawsuit are not taxable income under the United States Internal Revenue Code.
This is because damages in a wrongful death claim compensate a grieving family for losses they sustained and are not considered “income.” However, the IRS will assess tax on certain portions of a wrongful death award.
Damages in a Texas Wrongful Death Lawsuit
Losing a loved one in a preventable accident is one of the most horrific events a family can experience.
To help offset the impact of such a tragedy, Texas law allows surviving families to pursue financial compensation from the at-fault party.
While every case is unique, a Texas wrongful death case often contains compensation amounts for the following:
- Loss of financial support;
- Loss of future financial contributions;
- Loss of household services;
- Loss of company and companionship;
- Mental and emotional anguish; and
- Funeral costs and burial expenses.
These damages all fit into the category of “compensatory damages,” meaning they compensate a family for their losses related to the accident.
In addition, courts award punitive damages in some Texas wrongful death cases. Unlike compensatory damages, punitive damages (or exemplary damages) focus on punishing the at-fault party for their actions.
Punitive damages are not awarded in every case. To obtain punitive damages, a family must show that the at-fault party acted with fraud, malice, or gross negligence.
Not only that, but a family must prove that punitive damages are appropriate by “clear and convincing evidence,” which is a high legal standard.
When Are Wrongful Death Settlements Taxable?
While the tax code is quite complex and exceptions exist, the general rule is that compensatory damages are not taxable while punitive damages are taxable.
The reason for this goes back to the purposes of each type of damages award. Compensatory damages help offset the losses a family suffers, and therefore, are not considered income by the IRS.
In other words, these damages make up for a loss.
On the other hand, punitive damages do not relate to a family’s losses and instead are meant as a form of punishment. Because of this, the IRS considers punitive damages as taxable income in most cases.
How Tax Consequences Play Into Wrongful Death Settlement Negotiations
Most Texas wrongful death cases do not go to trial. Instead, the grieving family reaches an agreement with the insurance company to settle the case. Insurance companies like to settle cases because it limits their risk.
However, they also want to settle a case for as little as possible.
When engaging in settlement negotiations, it is important that you understand the tax consequences of the insurance company’s offer.
For example, emotional distress damages can fall into the category of compensatory or punitive damages, depending on how they are classified.
Settlements in wrongful death cases often involve significant amounts of money. And given the high income-tax rate, it is imperative that families do everything they can to keep as much of the settlement as possible.
An experienced Texas personal injury attorney can help you understand the tax repercussions of an insurance company’s proposed offer. A lawyer may also help you negotiate a more favorable settlement.
In short, you should always discuss the tax consequences of a wrongful death lawsuit with your lawyer before accepting any offer from the insurance company.
Contact the Texas Wrongful Death Lawyers at the Zimmerman Law Firm, P.C.
If you recently lost a loved one in a Texas accident, the dedicated personal injury lawyers at Zimmerman Law Firm, P.C., are here for you. Our team of attorneys has more than 85 years of experience advocating on behalf of injury victims and their families.
We routinely handle cases involving some of the largest insurance companies in the country. With our help, you can hold the negligent party responsible for your loved one’s death accountable for their actions.
Not only can this provide your family with much-needed compensation in the wake of the tragedy, but it will also make Texas a safer place by discouraging dangerous and irresponsible behavior.
We handle all types of personal injury cases, including those involving car accidents, slip and falls, work injuries, and product liability claims.
To learn more, and to schedule a free consultation, give us a call at 254-272-3220 today. You can also reach us through our online form.