If you've won a lawsuit for the wrongful death of a loved one, you know that no amount of money can compensate you for your loss, but making every penny of that financial award work for you is important. In this article, get answers to your questions about the tax implications of a wrongful death lawsuit settlement or court-ordered award and learn what you need to consider about managing your finances.
Taxable and Non-taxable Damages
A settlement or court-ordered award from a wrongful death lawsuit can include a couple of different types of damages. The type of damages you're awarded will determine whether or not you'll be required to pay taxes.
The following are the different types of damages that you may be awarded:
- Compensatory damages. Compensatory damages are designed to compensate you for your loss. Because these damages are meant to restore your life to what it was before the lawsuit, it is not considered income and is not taxable.
- Punitive damages. Punitive damages are meant to punish. This type of award is given if the judge determines that the party responsible for the death was also guilty of gross negligence. Punitive damages are considered income and as such, you will be taxed. Be aware that punitive damages are also called "exemplary" damages.
- Other damages. You may also be awarded payments for emotional distress or lost wages. These types of awards are often taxable as well. Consult your financial advisor, tax consultant, or lawyere like those at the Law Offices Of John Drew Warlick Jr., P.A., to determine which amounts you'll be responsible to pay taxes on.
There is an exception involving compensatory damages in terms of taxes. If you claimed tax deductions on medical expenses involving your lost loved one, you will be required to pay taxes on those amounts after receiving your financial award.
Managing the Money from Your Lawsuit
Receiving any kind of financial windfall requires some careful thought and consideration. Besides determining what portion of your wrongful death lawsuit award may be taxable, there are several other factors that you'll need to discuss with your financial advisor, including the following:
- Build an emergency fund. In case of an emergency such as losing employment or an extended hospital stay, you should have enough money stashed to cover three to six months of living expenses.
- Splurging…carefully. It's fine to spend money on yourself and your loved ones for fun, but dashing off to the mall with a wallet full of cash may be disastrous. Take some time to think about what you really want before going out to shop.
- Don't make large purchases right away. Sometimes people who suddenly come into money feel like they're rich. Depending on the amount of your lawsuit, large purchases like a home or cars may be in your future, but take some time to think it through and talk to your financial advisor before getting into a credit situation that can take you down a bad path.
A wrongful death lawsuit is certainly not a financial windfall that you dreamed about, but it is important that you think carefully about what the money is going to mean for you and your family. Use the information in this article to understand your financial responsibilities and to plan for your financial future.