Losing a loved one due to someone else’s negligence or intentional harm is an incredibly painful experience.
Amidst the emotional turmoil, individuals often find themselves navigating legal matters, including the state’s wrongful death laws and settlement restrictions. A common question that arises during this challenging time is whether these settlements are subject to taxation.
Understanding if wrongful death settlements are taxed in South Carolina can provide clarity and help individuals make informed decisions regarding their finances and legal proceedings.
In the United States, how settlements like these are taxed depends on various factors, including the nature of the damages awarded, the components of the settlement, and applicable state and federal tax laws.
Typically, there’s a hierarchy of family members who may pursue the at-fault party for wrongful death.
South Carolina Code (Section 15-51-20) outlines the “Beneficiaries of action for wrongful death” as follows:
- A spouse
- A biological or adopted child younger than 25
- A biological or adoptive parent.
- A biological or adopted sibling
To qualify for a monetary award, a surviving sibling has to prove that their deceased loved one provided some or all of their financial support.
Taxation May Depend on the Types of Damages Involved
Generally, compensation received as a result of a wrongful death claim falls into two categories: compensatory damages and punitive damages.
Compensatory Damages
Compensatory damages are intended to reimburse the survivors for specific losses incurred as a result of the wrongful death.
These may include costs associated with:
- Medical expenses
- Funeral and burial costs
- Lost wages
- Loss of companionship
- Pain and suffering
In most cases, compensatory damages received in a wrongful death settlement are not considered taxable income at the federal level. The Internal Revenue Service (IRS) typically does not tax compensatory damages intended to compensate for physical injury or emotional distress.
However, it’s essential to note that certain components of a wrongful death settlement may be subject to taxation.
For example, if the settlement includes compensation for lost wages or lost income, these amounts may be taxable as ordinary income. Similarly, any interest accrued on the settlement amount while it was held in an account may also be subject to taxation.
Also, if the settlement includes compensation for non-physical injuries, such as defamation or invasion of privacy, the tax treatment may differ.
Punitive Damages
Punitive damages, on the other hand, are awarded to punish the defendant for their egregious conduct and to deter similar behavior in the future.
Unlike compensatory damages, punitive damages are generally taxable at both the federal and state levels. The IRS considers punitive damages to be taxable income, subject to the recipient’s ordinary income tax rate. State tax laws may vary regarding the taxation of punitive damages, so it’s crucial to consult with a tax professional or an attorney who handles wrongful death claims and is familiar with how taxation works when South Carolina cases like these result in settlements.
Another important consideration is the tax treatment of wrongful death settlements that involve structured payments or annuities per South Carolina’s Structured Settlement Protection Act.
In some cases, rather than receiving a lump sum settlement, the survivor may receive periodic payments over time. These structured settlements may have different tax implications than a one-time lump sum payment. While portions of each payment may be taxable, the tax treatment will depend on the specific terms of the settlement and applicable tax laws.
Additionally, the relationship between the deceased and the recipient of the settlement can impact the tax consequences. For example, if the recipient is a surviving spouse, the tax treatment of the settlement may differ from that of other beneficiaries, such as children or parents.
Surviving spouses may be eligible for certain tax benefits or exemptions not available to other beneficiaries.
Getting Help in Understanding How Taxes and Settlements Work
It’s crucial for individuals receiving wrongful death settlements to consider the potential tax consequences and plan accordingly. Consulting with a qualified South Carolina tax professional or attorney can help ensure compliance with tax laws and maximize the after-tax value of the settlement.
Keeping detailed records of the settlement and any related expenses can facilitate accurate reporting and documentation for tax purposes.
In addition, each state will have its own time limits on how long you have to file a claim for wrongful death. The statute of limitation in South Carolina is three (3) years from the time of death (Section 15-3-530). Your lawyer can help to ensure that the statute of limitations on your case does not lapse, causing you to lose your right to file at all.
The tax treatment of wrongful death settlements can be complex and may vary depending on the specific circumstances of the case.
While compensatory damages are generally not taxable at the federal level, certain components of the settlement, such as lost wages or punitive damages, may be subject to taxation. Structured settlements, state tax laws, and the relationship between the deceased and the recipient can all influence the tax consequences.
Seeking guidance from knowledgeable legal professionals like ours at The Solomon Law Group can help you navigate these complexities of understanding if wrongful death settlements are taxed. This insight will allow you to make informed decisions regarding your finances and legal affairs during this challenging time.
