Are Taxes Due on Wrongful Death Settlements?

If you have won a wrongful death lawsuit in New Mexico and received a settlement, then you have to be mindful of your tax requirements. Not paying the taxes due on any income you receive can bring about harsh penalties. According to the IRS, punitive damages, which would be any money you receive that is designed to punish the defendant and not directly related to paying for expenses, lost income or other monetary damages, are taxable under federal law. However, there are exceptions.

In general, any money you receive is taxable. It is only through exceptions that taxes are waived by the government. When it comes to a wrongful death settlement, it is considered income first and foremost. The law excludes any damages you receive to compensate for physical injuries or illnesses from being taxed. However, money received for emotional distress is not excluded and is taxable. Generally, the non-taxable exclusion applies only to those damages received that will be used to pay for medical care or other medical related expenses you incurred as a result of the injury or illness, called compensatory damages.

When it comes to wrongful death, though, things get a bit tricky. There are specific exemptions for these cases. After finding that many states only allow for punitive damages in wrongful death cases, the government decided to allow people in those states to exclude punitive damages. However, New Mexico does allow for both types of damages, so only compensatory damages can be excluded for tax purposes. This is general information only and is not intended to provide legal advice.

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