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Do I Have to Pay Taxes on a Wrongful Death Insurance Settlement?

By Connecticut Personal Injury Attorney on April 20, 2017

Are you receiving a wrongful death insurance settlement, or thinking of filing a wrongful death claim? Often, survivors wonder if they must pay taxes on a wrongful death insurance settlement. The answer is “sometimes,” but it depends on your particular case.

Reasons Why You May Be Concerned

Taxes can be higher on larger payouts, so you want to ensure that your costs are covered. Often high hospital and medical bills can accumulate before the death of a loved one. Plus, if the wrongful death was the fault of another person or company, you want them paying a fair amount. A lawyer can help make sure that the final total you receive is exactly what you require to pay outstanding bills.

Many people also want to ensure that they stay on the right side of the law. Failure to pay taxes can result in penalties, fines, and escalating interest rates. You certainly don’t want to have additional worries on top of mourning the wrongful death of a loved one.

What’s the Law on Paying Taxes in a Wrongful Death Settlement?

In Connecticut, if a survivor receives monetary compensation in a wrongful death insurance settlement, these proceeds may or may not be considered taxable, depending what type they are. The IRS treats wrongful death settlements the same anywhere in the USA.

In order to qualify for a non-taxable exemption, your wrongful death settlement must be considered “compensatory.” This means that the wrongful death settlement must be in a form of monetary compensation to cover the pain and suffering caused after the death.

A court case will determine this—they must decide if a third party has been responsible for the death of your loved one. It may have been due to an injury sustained during an accident, or a physical illness. The compensatory proceeds that are non-taxable will have no effect on your next federal tax return.

However, if you are awarded certain monetary amounts for other types of damages, you may have to claim the amounts on your tax return. These amounts are for awards for any lost wages, as they are considered income. If you receive a payment for punitive damages, they may also be considered income and must be claimed as income on your next tax return.

Keeping Track of Taxes

As you can see, it may get a bit tricky to determine whether you need to claim your settlement on your income taxes or not. In some instances, you may be required to claim a certain portion.

We’re sorry that you have lost a loved one. If you’re still confused on how to proceed with a wrongful death insurance settlement, please contact us at Naizby Law. We can assist you with all aspects of wrongful death settlements. Please give us a call today at (203) 245-8500 to set up an appointment.

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