WRONGFUL DEATH | TAX LIABILITY | COMPENSATORY VS. PUNITIVE DAMAGES
Federal tax exclusions under IRC § 104(a)(2), taxable exceptions, and Florida statutory damage allocations.
Published: October 31, 2023
Case Law: Commissioner v. Schleier; Coates v. R.J. Reynolds Tobacco Co.; Aames v. Commissioner
Key Authorities: 26 U.S. Code § 104(a)(2); Fla. Stat. § 768.21; Fla. Stat. § 626.99296; 26 U.S. Code § 5891
Jurisdiction: Florida State Courts & Federal Tax Jurisdiction
Is a Wrongful Death Settlement Taxable Income in Florida?
Wrongful death settlements can be significant, often reaching millions of dollars. Consequently, understanding whether a settlement will face taxation is essential. The Maderal Byrne & Furst wrongful death lawyers serving Coral Gables explain these tax implications below.
Wrongful death settlements paid for medical bills, funeral expenses, lost support, and mental pain and suffering are generally not taxable in Florida. Conversely, interest and amounts paid as punitive damages are subject to taxation.
What is the law for whether wrongful death settlements are taxable income in Florida?
26 U.S. Code § 104(a)(2) is the controlling law regarding whether wrongful death settlements are taxable in Florida. As a federal statute, this law establishes that amounts received on account of personal physical injuries or physical sickness do not constitute taxable income.
A critical question involves what the law means when it excludes amounts received “on account of personal physical injuries.” Specifically, what is included and what is excluded? Florida law authorizes wrongful death compensation across various categories—including medical bills, lost support and services, and mental pain and suffering. Therefore, a key inquiry is whether these forms of compensation qualify as payments received on account of physical injury.
The IRS answers this question liberally in favor of those receiving compensation. Wrongful death compensation for medical bills, lost support and services, and mental pain and suffering are considered compensation on account of physical injury. Therefore, they are not taxed.
In Commissioner v. Schleier, 515 U.S. 323, 329-30 (1995), the court explained the reasoning behind exempting these types of compensation from taxes. The court said that medical bills and pain and suffering wouldn’t have happened without the injury, making them on account of personal injury, as the law states.
Note: If you deduct medical expenses in tax years before you received the settlement, these amounts may be subject to tax.
Florida Wrongful Death Compensation and Taxable Income
Florida Statutes § 768.21 discusses who may benefit from a wrongful death claim and what they may recover.
Survivors:
- Lost support and services
- Companionship and protection
- Mental pain and suffering
- Medical or funeral expenses
Estate:
- Loss of earnings
- Loss of net accumulations
- Medical or funeral expenses
Generally, the IRS exempts these types of wrongful death compensation from tax.
Punitive damages are taxable income in a wrongful death claim
In a wrongful death claim, plaintiffs may recover punitive damages. Coates v. R.J. Reynolds Tobacco Co., No. SC21-175 (Fla. Jan. 5, 2023). Punitive damages are taxable income.
Are punitive damages awarded for a wrongful death case taxed?
Yes. Punitive damages awarded for a wrongful death case are taxed. 26 U.S. Code § 104(a)(2) identifies punitive damages as an exception to the types of wrongful death compensation that are not taxed. The IRS lawsuits audit guide states: “[P]unitive damages are not excludible under IRC § 104(a)(2), regardless of whether received in connection with a physical or non-physical injury.”
Is interest on a wrongful death settlement subject to tax?
Yes. Interest on a wrongful death settlement is subject to tax. Florida law allows prejudgment interest, and the IRS says that prejudgment interest is always taxable. Aames v. Commissioner, 94 T.C. 189 (1990).
Are attorney fees in a wrongful death claim deductible from taxes?
Yes. To the extent that wrongful death compensation is taxable, attorney fees may be deducted.
It is appropriate to report the entire amount as gross income, along with an itemized deduction.
The deduction may be taken for the share of the proceeds subject to tax.
Are lump sum and structured wrongful death settlements taxed the same?
The same rules apply for wrongful death settlement taxation, whether the compensation is paid in a lump sum or structured settlement. However, if a structured settlement is transferred without court approval as required by Florida Statutes § 626.99296, an excise tax applies. (26 U.S. Code § 5891).
What Wrongful Death Beneficiaries Should Know
How you classify the funds you receive in a wrongful death settlement is important. It may have tax implications. If the IRS believes that a settlement mischaracterizes the true nature of the compensation, it can conduct an inquiry.
Wrongful Death Lawyers in Florida
At Maderal Byrne & Furst, we help our clients identify and negotiate all the relevant considerations as they pursue wrongful death compensation.
To talk about your situation, contact our law firm today.
About Maderal Byrne & Furst
Maderal Byrne & Furst PLLC is a Miami-based personal injury law firm. We encourage you to learn more about our firm, meet our attorneys, explore our other practice areas, view our results or see our rating and reviews on Google.
LEGAL DISCLAIMER: This blog post is provided for general informational and educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship. The law is subject to change, and the application of legal principles varies depending on the specific facts of each case. If you have questions about your specific situation, you should consult a licensed Florida attorney. This post discusses legal concepts and principles addressed in the cited case(s). It is not intended to make any assertions about the truth of any allegations or evidence relating to any party to that case.
Citations & Sources
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26 U.S. Code § 104(a)(2) (Compensation for Injuries or Sickness)
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Fla. Stat. § 768.21 (Damages Awarded in Wrongful Death Actions)
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Commissioner v. Schleier, 515 U.S. 323 (1995)
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Coates v. R.J. Reynolds Tobacco Co., 365 So. 3d 353 (Fla. 2023)
