Significance

• Wrongful death settlement compensation becomes part of the decedent's estate. The decedent's estate is normally subject to federal estate taxes. Physical wrongful death awards are the exception to this estate tax law.
  
  

Types

• Physical sickness or physical injury settlements are treated as non-taxable by the IRS if the decedent did not itemize the medical expenses as a deduction prior to the decedent's death. Decedents who did not deduct the medical expenses provide the estate with tax-free compensation for wrongful death settlements based upon physical injuries.
  
  

Considerations

• Punitive damage awards are taxable and must be reported as "other income" on Form 1040. Emotional distress and mental anguish awards are taxable for the amount exceeding the medical costs that were not deducted. The emotional distress award is reported on Form 1040.
  
  

Warning

• Since laws may frequently change, you should not use this information as a substitute for legal advice. Seek an attorney licensed to practice in your jurisdiction for advice.