According to the Internal Revenue Service (IRS), a wrongful death settlement is not generally classified as taxable income. IRS Rule 1.104-1 shows that compensatory damages are not considered part of gross income, as they are received for physical injuries or physical sickness. This includes damages paid for pain and suffering that resulted from the physical injury or illness which caused your loved one’s death.
However, the IRS also sets apart situations in which certain types of damages are received – for example, punitive damages may be considered income. To fully understand how these tax regulations apply to your situation, speak to a qualified and experienced wrongful death attorney.
Read on to learn more about federal and state laws that apply to wrongful death claims and settlements.
The Categories of Damages in Wrongful Death Claims
Two types of damages may be awarded in a wrongful death claim under Arkansas law: compensatory and punitive damages.
Compensatory damages can be broken down into the following two categories:
- Family claims: Seeking damages to compensate the family for losses suffered due to the death of their loved one
- Estate claims: Seeking damages to compensate the deceased’s estate for losses suffered due to his or her death
Family claim damages
When a loved one dies, his or her family members may suffer greatly. Not only do the surviving spouse and children lose his or her companionship and emotional support, but they also lose the income and services that person used to provide.
Family claim damages seek monetary compensation for losses such as:
- Deceased person’s lost wages
- Services, such as childcare and elderly care
- Education and training the deceased person would have provided to his or her children
- Emotional distress and grief associated with the loved one’s passing
- Loss of consortium – loss of affection, moral support, marital intimacy, and the ability to have children
- The deceased person’s expected lifespan
- How long the beneficiaries would have received financial support from the deceased
- Expected earnings of the deceased
- The deceased’s customary spending on personal expenses
- The deceased’s state of health
- His or her personal habits
- His or her profession
- The expected lifespan of the surviving spouse and other beneficiaries
- The length of time before the deceased’s child or children reaches majority
A wrongful death lawyer would also consider these factors when calculating a fair settlement. He or she would then use this to negotiate with insurance companies to try to achieve a settlement acceptable to all parties. If it is impossible to secure this out of court, the case will proceed to trial.
Estate claim damages
This part of the compensation award is designed to cover expenses that your loved one incurred as a result of his or her death. This could provide coverage for:
- Medical expenses related to the final injury of the deceased person
- Pain and suffering endured prior to his or her demise
- Lost wages prior to his or her death
- Caretaker expenses prior to death
- Funeral and burial expenses
In Arkansas, there is no cap on compensatory damages that can be awarded for a wrongful death claim.
Arkansas law allows the family or legal representatives of the deceased to seek both types of damages. However, none of this compensation becomes part of the assets of the deceased person’s estate. The entire amount of compensation will be paid to the claimants.
Depending on the circumstances that led to the death of your loved one, the judge or jury may award punitive damages. Punitive damages are not usually awarded in cases that settle out of court.
Unlike compensatory damages, punitive damages are designed to punish the defendant, rather than compensate the victim. These damages may be awarded when the defendant was particularly reckless, acted willfully and maliciously, or showed no remorse for his or her actions.
In the past, under Arkansas Code § 16-55-208, punitive damages were capped at $250,000, or 3 times the amount of compensatory damages, but not more than $1 million. However, in 2011, the Supreme Court of Arkansas declared this law unconstitutional.
The IRS also views punitive damages differently, so these are usually subject to tax.
Tax on Punitive Damages
While the IRS allows taxpayers to exclude compensatory damages from their gross income, punitive damages are different.
Punitive damages received in wrongful death cases must be declared as “Other Income” on Form 1040. This would be the case even if these damages were part of a settlement for physical injuries or sickness.
The only exception is in states that only award punitive damages in wrongful death cases. However, this is not the case in Arkansas, as the state also allows for economic and non-economic damages in such cases.
Other Taxable Parts of a Wrongful Death Settlement
While the compensatory damages in a wrongful death settlement are not usually taxable, certain situations may require you to declare part of the compensation on your tax return.
In addition to punitive damages, these include:
- Deductions in previous years: When you took an itemized deduction for medical expenses related to the illness or injury in previous years.
- Interest on a settlement: This is usually taxable as “Interest Income” and must be reported on Form 1040, line 2b.
- Emotional distress: Emotional distress and mental anguish that did not result from a personal physical injury or physical sickness could be taxable.
Are legal fees tax deductible?
In wrongful death cases, attorney fees incurred to produce income are not generally tax deductible. Usually, only a portion of a wrongful death settlement is considered income by the IRS. To calculate how much you will have to pay, you should seek qualified legal advice.
In the past, it was possible to deduct legal fees in relation to personal matters as a “miscellaneous itemized deduction.” However, since the passing of the 2017 Tax Cuts and Jobs Act, this has no longer been possible.
The value of legal advice
The law surrounding taxes on wrongful death settlements is indeed complex. You need to get things right and report all that is required to the IRS. In such a case as this, there is no substitute for qualified legal advice.
An experienced Arkansas wrongful death attorney may be able to guide you through your settlement and show you what you qualifies as taxable income. This should allow you to hold on to as much of your settlement as possible so you can gain the maximum benefit for years to come.
Who Can File a Wrongful Death Claim in Arkansas?
In wrongful death cases, the injured person is unable to file a claim for compensation. Therefore, it must be done on his or her behalf; under Arkansas law, this must be done by the person’s estate representative. If the deceased did not appoint someone to this role, one of their heirs may take on the role.
The heirs may include the following:
- Surviving relatives, including the spouse, children, parents, or siblings of the deceased
- Someone standing in loco parentis (someone in the place of a parent, such as a legal guardian) to the deceased person
- Someone who stood in loco parentis to the deceased person at any point during his or her lifetime
How is a wrongful death settlement distributed?
A settlement negotiated out of court may be distributed as agreed upon by the involved parties. When you go to trial, on the other hand, a judge will approve the settlement and will determine how much compensation each beneficiary will receive – except for when the suit is tried by a jury.
Unlike in some states, in Arkansas, the settlement is not divided equally between all beneficiaries. Instead, wrongful death settlements are divided based on the actual loss each beneficiary has suffered.
Those who are financially and/or emotionally dependent on the deceased person may receive a greater share than those who are financially independent. Due to the complex nature of this process, it is vital to seek qualified legal counsel to protect your rights.
Statute of limitations in Arkansas wrongful death claims
In most cases, families must file a wrongful death suit within 3 years of the person’s death. However, if your loved one’s death was caused by suspected medical malpractice, Arkansas’s 2-year statute of limitations may apply.
If you do not file a suit before the deadline, you may miss out on the opportunity to pursue compensation. So, rather than delaying, talk to an experienced wrongful death lawyer right away to explore your legal options.
How to Obtain a Wrongful Death Settlement in Arkansas
Before you can even think about paying taxes on a wrongful death settlement, you need to win your case. Wrongful death cases can be complex, as it is the plaintiff’s (or his or her attorney’s) responsibility to prove that the defendant’s negligent or reckless actions caused the death of his or her family member.
While there are never any guarantees of success, the first step toward pursuing justice is to schedule a case consultation with a compassionate Arkansas wrongful death lawyer. He or she will listen to the circumstances of your loved one’s death and can advise you on the legal avenues you could pursue.
Situations leading to wrongful death claims
An attorney reviewing a potential wrongful death claim must first be satisfied that the death meets the definition of “wrongful death” under Arkansas law.
Local law states that the death of a person or unborn child must have been caused by a “wrongful act, neglect, or default…[which] would have entitled the party injured to maintain a course of action to recover damages in respect thereof if death had not ensued.”
Many scenarios could result in wrongful death claims, such as:
- Auto accidents: In 2021, 693 people lost their lives on Arkansas roads. If your loved one died in a fatal auto accident that was caused by someone else’s negligence, you may be able to file a wrongful death lawsuit.
- Medical malpractice: Surgical errors, inaccurate diagnoses, and improper treatment are just some of the ways in which medical malpractice can lead to premature death.
- Death of an unborn child: Under certain circumstances, Arkansas law allows parents whose unborn child dies to pursue a wrongful death claim. A qualified lawyer can talk you through these scenarios to see whether you have a case or not.
- Intentional acts: In 2021, there were 321 homicides in Arkansas. While it is the job of the criminal justice system to convict and sentence offenders, surviving family members may have the right to pursue compensation by filing a civil case. The burden of proof in criminal and civil cases is different. So even if the defendant has been acquitted in a criminal case, you may still have recourse to file a wrongful death lawsuit.
These are just a few scenarios that could lead to wrongful death lawsuits. Even if the circumstances of your loved one’s death do not match any of the above, it is still beneficial to seek legal advice. During a free case evaluation, a wrongful death lawyer will talk you through your case and explain your chances of success.
Proving liability in wrongful death cases
A wrongful death attorney must next consider the likelihood of proving liability. This includes the following legal factors:
- Duty of care: Did the responsible party have a duty of care toward the deceased person?
- Negligence or recklessness: Did the wrongful act, neglect, or default violate the duty of care?
- Causation: Did these actions or inactions directly cause the victim’s death?
- Damages: Are the deceased person’s survivors entitled to monetary damages?
Having considered these factors, he or she will advise you on how likely your case is to succeed and whether the firm is willing to take it on. If the firm agrees to fight your case, the legal team will get to work building a strong case for damages.
Sourcing evidence in wrongful death cases
Your legal team will leave no stone unturned in its search for evidence to prove liability. This may include gathering:
- Death certificate
- Autopsy results, if applicable
- Police reports
- Videos and photographs from the scene, if the death was caused by an accident
- Eyewitness testimony
- Internal reports, if medical malpractice, nursing home abuse, or similar issues are suspected
- Expert witness testimony
- Medical records
The goal is to gather sufficient evidence to meet the burden of proof required by the court or the insurance company. Share any evidence that you have with your attorney, and the legal team will work hard to source the rest.
Should I Settle or Go to Trial?
A wrongful death attorney will usually first try to secure a fair settlement through negotiations with the defendant or his or her insurance company. These negotiations can be tough, which is why it is best to leave them to trained litigators who know how to aggressively protect your rights.
Insurance companies will always try to settle for the lowest amount possible. It’s therefore the job of your legal counsel to fight hard for the compensation you deserve.
If, after repeated efforts, it is still not possible to secure a reasonable settlement, your attorney may advise you to go to trial. Although there are never any guarantees of success, an experienced wrongful death lawyer will fight to present your case to the judge or jury clearly to try to secure the settlement you and your family deserve.
Understanding Your Wrongful Death Settlement
A wrongful death settlement should provide some relief during this distressing period of time, allowing you to focus on rebuilding your life. The last thing you want to do then is start worrying about whether you have declared everything you need to to the IRS.
Experienced and skillful Arkansas wrongful death attorneys can put your mind at rest. It can all start with a free case evaluation with the legal team at Minton Law Firm. If our attorneys agree to take on your case, our legal team will use all the legal resources at our disposal to pursue justice on your behalf.
When your claim or lawsuit is successful, our lawyers will take the time to help you to understand your wrongful death settlement. We will talk you through what is considered taxable income and what you do not need to report.
While a wrongful death settlement can never undo the pain and loss associated with the death of your loved one, it can help you to face the future with greater confidence. Schedule a free consultation by calling us 24/7 at 855-Xadjuster or reaching out online. We are proud to serve the following areas: Little Rock – Pulaski County – Arkansas, Benton – Saline County – Arkansas, and Conway – Faulkner County – Arkansas.