Are Wrongful Death Settlements Taxable?

Catastrophic Injury/Wrongful Death - October 12, 2021

In Illinois, if a person loses their life as a result of the negligent or intentional actions of someone else, the surviving family members of the deceased will likely be able to recover compensation for their losses. However, family members and the personal representative of the deceased’s estate need to know whether or not wrongful death settlements are taxable in Illinois. Here, we will look at what the IRS says about taxing wrongful death claims. 

Taxes Are Nearly Always a Certainty – Except for Wrongful Death Claims in Illinois

You need to know that your Illinois wrongful death settlement is generally not taxable. When we turn directly to information provided by the Internal Revenue Service (IRS), we can see information regarding whether or not certain types of injury and wrongful death claims are taxable (IRS Rule 1.104-1).

Looking further into this rule, we can see that wrongful death settlements are non-taxable because the IRS classifies them as part of claims that result from personal injuries or physical illnesses. This is important information for family members and the estate of the deceased to know in Illinois. 

When you and your loved ones realize that a wrongful death lawsuit settlement or jury verdict is not taxable, this can help you and your financial planners ensure that the settlement money goes where it needs to go to last the longest to ensure your family’s needs are met.

Some of the main types of compensation paid to the estate and family members include the loss of financial support the deceased would have provided, including their lost wages. This also includes various types of consortium damages, such as the loss of companionship, society, and sexual relations the deceased would have provided.

Are There Exceptions to the Non-Tax Rules?

There are some exceptions when it comes to wrongful death lawsuit settlements and tax status. As we mentioned above, the IRS will not actually tax the wrongful death lawsuit settlement. However, there are some situations where the IRS may tax portions of the settlement not directly related to the wrongful death. This can include:

• Any part of the settlement or jury verdict amount received for medical bills or other expenses that have already been deducted from income in previous years.
• Any part of the settlement or jury verdict the family receives for emotional distress if the distress was not a direct result of the injury or illness that led to the wrongful death.
• Any proceeds from a wrongful death settlement or jury verdict classified as punitive damages. These types of damages are not awarded in every wrongful death claim, and they are reserved for instances where the defendant was found to be grossly negligent or intentionally caused the death.

A skilled Chicago wrongful death attorney will handle every aspect of these claims, and they will be able to help you understand which portions of the settlement are taxable and which portions are not taxable. 

Who Can Receive Wrongful Death Payments in Illinois?

In Illinois, wrongful death lawsuits have to be filed by the personal representative of the deceased’s estate. However, the court will award damages to the deceased’s survivors and the estate. In Illinois, these damages are meant to be paid to the deceased’s surviving spouse and next of kin according to the level of dependency on the deceased at the time of death. Aside from the spouse, this can include children and other relatives.