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However, if you get punitive damages for wrongful death, then you have pay income tax as the amount is taxable.
According to IRS Publication 4345, wrongful death claims fall into compensation for physical injury category. However, this is not clearly explained in the publication. Compensatory payments for wrongful deaths are income tax exempt if the survivors receive the compensation. Punitive damages, as mentioned earlier, are taxable. However, depending on the state law, it is quite possible that the amount received as punitive damage is tax free when it comes to wrongful death.
A wrongful death claim is the property of the decedent’s estate and you might have to pay estate taxes on the total estate value, and these taxes would have to be paid to the IRS. However, the IRS has imposed federal exemptions for estate taxes and unless the total value of the estate does not exceed the exemption, you will not have to not have to pay taxes. In 2002 and 2003, exempt limit was $1 million. This amount was increased to $1.5 million; and in 2006 through 2008, exemption amount was further increased to $2 million.
You have to remember that if you are paying a lawyer to fight a lawsuit for a wrongful death claim, you can deduct the legal fees from tax return because if you receive the wrongful death claim, the amount does not have to be reported on your income tax returns.
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