The general rule in Arizona is that wrongful death settlement sums are not taxable by either the federal or state governments.
In this article, we cover how the government treats wrongful death settlements regarding taxation. If you have questions about a wrongful death settlement or want representation, call Stone Rose Law at (480) 498-8998 or contact us online.
What you can receive as compensatory damages in a wrongful death claim depends on the harm your decedent relative suffered because of someone else’s negligence. These fall into three categories:
Economic damages are compensatory damages. This means that you can usually prove them easily and establish a value for them.
Examples of economic damages in a successful wrongful death claim include medical costs for treatment the decedent received after the harm until dying, the value of the decedent’s lost wages and expected earnings, the value of household services the deceased person would have provided, and funeral expenses and burial costs.
These wrongful death damages are still compensatory damages, but are more subjective and do not lend themselves as easily to calculation into sums of money.
Non-economic damages include amounts for pain and suffering, mental anguish and emotional distress damages, loss of consortium for a surviving spouse, loss of guidance, and loss of nurturing, care, and emotional support no longer available to surviving family members.
In cases where the person who caused the wrongful death acted grossly negligently or even intentionally, a court may award punitive damages in a wrongful death lawsuit.
Punitive damages are not meant to compensate, but as their name implies, they are meant to punish a wrongdoer and, to some degree, discourage others from doing something similar; this is why they are sometimes called exemplary damages.
The general rule for taxation of settlements is that if the purpose of the settlement sum is to compensate you, it is not taxable. The logic here is understandable: taxable income usually reflects something you gain, while compensation is meant to restore you because of a loss you have suffered. Governments are usually not going to tax you to restore losses.
This is where punitive damages differ from economic and non-economic damages because punitive damages reflect a monetary gain instead of compensating you for something you have lost. The same rule applies to accrued interest you receive on any settlement amount.
Wrongful death compensation you receive based on an Arizona wrongful death claim is essentially the same as for any other kind of personal injury claim. As long as the settlement sum is compensatory in intent, it is likely not taxable.
In Arizona, with a few exceptions, wrongful death settlements are generally non-taxable. The U.S. Internal Revenue Service (IRS) considers compensatory damages like economic damages to be non-taxable, but punitive damages are taxable compensation.
In certain circumstances, wrongful death settlement amounts otherwise not taxable may still be subject to tax. These include:
For medical expense itemized deductions, IRS Publication 4345 (Rev. 9-2023) states the following:
“If you receive a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit.
If part of the proceeds is for medical expenses you paid in more than one year, you must allocate on a pro rata basis the part of the proceeds for medical expenses to each of the years you paid medical expenses.”
The IRS rule on punitive damages in wrongful death settlements or awards is that these damages are taxable income, unless state law specifically exempts them from being taxable.
According to IRC Section 104(c), punitive damages awarded for wrongful death in certain states where state law provides only for punitive damages in wrongful death claims are excluded from gross income.
Arizona does not make any specific exception for punitive damages in this way. Therefore, in Arizona, punitive damages are not compensatory but are financial awards subject to tax, which you must report as “other income” for tax purposes.
Arizona does not have an inheritance tax for estates. The federal government does, however, and if a wrongful death settlement agreement increases the value of the decedent’s estate over the federal threshold for exemption from inheritance taxes, then the inheritance tax may apply.
Source: IRS.gov, Estate Tax
Much of the consideration about what tax consequences you experience in your Arizona wrongful death settlement, specifically what is or is not taxable income, depends on how federal tax laws apply to your case. This requires a thorough understanding of how IRS rules work.
Most people do not have the time or expertise to know what these rules are or to keep up with changes to them.
Fortunately, an experienced wrongful death settlement attorney, like one of ours at Stone Rose Law, can help you navigate the applicable IRS rules to your wrongful death lawsuit settlement and how to make sure you do not run into trouble with them.
If you have questions about the tax implications of your wrongful death case, call us for answers at (480) 498-8998 or contact us online, so you can get a free consultation with a Phoenix wrongful death attorney.
